What to Do When Rates Fall

Recently we have experienced a significant drop in mortgage rates with nightly coverage from our friends in the media. This has caused a major influx in business for all mortgage bankers. However, how do you deal with stretched processing timelines, borrowers calling to renegotiate, and/or adjusting hedge positions? All of these questions need to be addressed on a daily basis. Below is how we see the best practices playing out amongst our clients:

Lock Periods and Extensions

Make sure the new locks being taken today reflect the increased amount of time required to close your loans – some have added an extra 15 days to the lock request period, and others monitor and adjust automatically the expiration dates of their locks when it appears a loan is not meeting the average timeline, ( e.g., if a normal in process time required is 10 days and a loan has reached day 15 clients confirm the loan is still being worked on and the borrower is still engaged in the process then they add 10 – 15 days to the lock period). Hence, keep an eye on locks about to expire within a week or two and make sure to extend those with a high probability of CLOSING.

Profit Margins

Almost all clients have increased their profit margins to help pay for anticipated increased hedge costs and/or to slow the avalanche of business heading their way.


Most either do not allow for any renegotiation or use a policy of no reduced fees to the borrower and no increase in LO Comp. However, they will lower the rate at the time of Docs, but only half of the market move. For example, if a loan was locked at 3.75% and -1 point rebate and the same loan would be priced for the same lock period today @ 3.25% and -1 point rebate they would reprice the loan drawing docs today at 3.5% @ -1 point rebate, but only upon borrower’s written request not a blanket policy for the entire locked pipeline.

Position Management

For those that have enough option coverage, the market move will not impact their coverage ratios or position. Some have even profited handsomely from the increased OAS spreads on mortgages versus Treasuries with long Synthetic puts created by owning Treasury Calls and short TBA. As the amount of coverage automatically decreases as rates drop and your exposure goes down due to increased fallout. For pipeline managers that have chosen not to have any options or not nearly enough, they will need to continuously monitor their closing ratios and expected fallout within their position. MCM has modeled fallout rates to increase as the market improves using Neural Net/ AI systems tailored to each client’s pipeline and will continue to monitor their performance daily. Check with your hedge advisory firm to see what they have done for you.

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