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Mortgage-pipeline risk

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Definition of Mortgage-pipeline risk

Mortgage-pipeline Risk Image 1

Mortgage-pipeline risk

The risk associated with taking applications from prospective mortgage borrowers
who may opt to decline to accept a quoted mortgage rate within a certain grace period.



Related Terms:

Fallout risk

A type of mortgage pipeline risk that is generally created when the terms of the loan to be
originated are set at the same time as the sale terms are set. The risk is that either of the two parties, borrower
or investor, fails to close and the loan "falls out" of the pipeline.


Alternative mortgage instruments

Variations of mortgage instruments such as adjustable-rate and variablerate
mortgages, graduated-payment mortgages, reverse-annuity mortgages, and several seldom-used
variations.


Asset-specific Risk

The amount of total risk that can be eliminated by diversification by
creating a portfolio. Also known as company-specific risk or
unsystematic risk.


Bankruptcy risk

The risk that a firm will be unable to meet its debt obligations. Also referred to as default or insolvency risk.


Basis risk

The uncertainty about the basis at the time a hedge may be lifted. Hedging substitutes basis risk for
price risk.



Beta risk

risk of a firm measured from the standpoint of an investor who holds a highly diversified portfolio.


Business risk

The risk that the cash flow of an issuer will be impaired because of adverse economic
conditions, making it difficult for the issuer to meet its operating expenses.


Mortgage-pipeline Risk Image 2

Call risk

The combination of cash flow uncertainty and reinvestment risk introduced by a call provision.


Closed-end mortgage

mortgage against which no additional debt may be issued.


Collateralized mortgage obligation (CMO)

A security backed by a pool of pass-throughs , structured so that
there are several classes of bondholders with varying maturities, called tranches. The principal payments from
the underlying pool of pass-through securities are used to retire the bonds on a priority basis as specified in
the prospectus.
Related: mortgage pass-through security


Commercial Mortgage

A loan made on real estate collateral, other than a residential property, in which a mortgage is given to secure payment of principal and interest.


Commercial risk

The risk that a foreign debtor will be unable to pay its debts because of business events,
such as bankruptcy.


Company-specific risk

Related: Unsystematic risk


Companyspecific Risk

See asset-specific risk


Completion risk

The risk that a project will not be brought into operation successfully.


Conventional mortgage

A loan based on the credit of the borrower and on the collateral for the mortgage.


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Counterparty risk

The risk that the other party to an agreement will default. In an options contract, the risk
to the option buyer that the option writer will not buy or sell the underlying as agreed.
Country economic risk Developments in a national economy that can affect the outcome of an international
financial transaction.


Country financial risk

The ability of the national economy to generate enough foreign exchange to meet
payments of interest and principal on its foreign debt.



Country risk General

Level of political and economic uncertainty in a country affecting the value of loans or
investments in that country.


Credit risk

The risk that an issuer of debt securities or a borrower may default on his obligations, or that the
payment may not be made on a negotiable instrument. Related: Default risk


Credit Risk

Financial and moral risk that an obligation will not be paid and a loss will result.


Cross-border risk

Refers to the volatility of returns on international investments caused by events associated
with a particular country as opposed to events associated solely with a particular economic or financial agent.


Currency risk

Related: Exchange rate risk


Currency risk sharing

An agreement by the parties to a transaction to share the currency risk associated with
the transaction. The arrangement involves a customized hedge contract embedded in the underlying
transaction.


Default risk

Also referred to as credit risk (as gauged by commercial rating companies), the risk that an
issuer of a bond may be unable to make timely principal and interest payments.


Diversifiable risk

Related: unsystematic risk.


Economic risk

In project financing, the risk that the project's output will not be salable at a price that will
cover the project's operating and maintenance costs and its debt service requirements.


Equilibrium market price of risk

The slope of the capital market line (CML). Since the CML represents the
return offered to compensate for a perceived level of risk, each point on the line is a balanced market
condition, or equilibrium. The slope of the line determines the additional return needed to compensate for a
unit change in risk.



Event risk

The risk that the ability of an issuer to make interest and principal payments will change because
of rare, discontinuous, and very large, unanticipated changes in the market environment such as (1) a natural
or industrial accident or some regulatory change or (2) a takeover or corporate restructuring.


Exchange rate risk

Also called currency risk, the risk of an investment's value changing because of currency
exchange rates.


Exchange risk

The variability of a firm's value that results from unexpected exchange rate changes or the
extent to which the present value of a firm is expected to change as a result of a given currency's appreciation
or depreciation.


Financial risk

The risk that the cash flow of an issuer will not be adequate to meet its financial obligations.
Also referred to as the additional risk that a firm's stockholder bears when the firm utilizes debt and equity.


financial risk

risk to shareholders resulting from the use of debt.


Firm-specific risk

See:diversifiable risk or unsystematic risk.


Flat price risk

Taking a position either long or short that does not involve spreading.


Force majeure risk

The risk that there will be an interruption of operations for a prolonged period after a
project finance project has been completed due to fire, flood, storm, or some other factor beyond the control
of the project's sponsors.


Foreign exchange risk

The risk that a long or short position in a foreign currency might have to be closed out
at a loss due to an adverse movement in the currency rates.


Freddie Mac (Federal Home Loan Mortgage Corporation)

A Congressionally chartered corporation that
purchases residential mortgages in the secondary market from S&Ls, banks, and mortgage bankers and
securitizes these mortgages for sale into the capital markets.


Funding risk

Related: interest rate risk


GEMs (growing-equity mortgages)

mortgages in which annual increases in monthly payments are used to
reduce outstanding principal and to shorten the term of the loan.


Geographic risk

risk that arises when an issuer has policies concentrated within certain geographic areas,
such as the risk of damage from a hurricane or an earthquake.


GMCs (guaranteed mortgage certificates)

First issued by Freddie Mac in 1975, GMCs, like PCs, represent
undivided interest in specified conventional whole loans and participations previously purchased by Freddie Mac.


Government National Mortgage Association (Ginnie Mae)

A wholly owned U.S. government corporation
within the Department of Housing & Urban Development. Ginnie Mae guarantees the timely payment of
principal and interest on securities issued by approved servicers that are collateralized by FHA-issued, VAguaranteed,
or Farmers Home Administration (FmHA)-guaranteed mortgages.


Graduated-payment mortgages (GPMs)

A type of stepped-payment loan in which the borrower's payments
are initially lower than those on a comparable level-rate mortgage. The payments are gradually increased over
a predetermined period (usually 3,5, or 7 years) and then are fixed at a level-pay schedule which will be
higher than the level-pay amortization of a level-pay mortgage originated at the same time. The difference
between what the borrower actually pays and the amount required to fully amortize the mortgage is added to
the unpaid principal balance.


Herstatt risk

The risk of loss in foreign exchange trading that one party will deliver foreign exchange but the counterparty financial institution will fail to deliver its end of the contract. It is also referred to as settlement risk.


High-Risk Small Business

Firm viewed as being particularly subject to risk from an investors perspective.


Idiosyncratic Risk

Unsystematic risk or risk that is uncorrelated to the overall market risk. In other words,
the risk that is firm specific and can be diversified through holding a portfolio of stocks.


Inflation risk

Also called purchasing-power risk, the risk that changes in the real return the investor will
realize after adjusting for inflation will be negative.


Insolvency risk

The risk that a firm will be unable to satisfy its debts. Also known as bankruptcy risk.


Insured Mortgage

An insured mortgage protects only the mortgage lender in case you do not make your mortgage payments. This coverage is provided by CMHC [Canada mortgage and Housing Corporation] and is required if a person has a high-ratio mortgage. [A mortgage is high-ratio if the amount borrowed is more than 75% of the purchase price or appraised value, whichever is less.]


Interest rate risk

The risk that a security's value changes due to a change in interest rates. For example, a
bond's price drops as interest rates rise. For a depository institution, also called funding risk, the risk that
spread income will suffer because of a change in interest rates.


Interest Rate Risk

Possibility that interest rates will rise during the term of a loan thereby increasing the annual cost of borrowing.


judgmental method (of risk adjustment)

an informal method of adjusting for risk that allows the decision maker
to use logic and reason to decide whether a project provides
an acceptable rate of return


Liquidity risk

The risk that arises from the difficulty of selling an asset. It can be thought of as the difference
between the "true value" of the asset and the likely price, less commissions.


Market price of risk

A measure of the extra return, or risk premium, that investors demand to bear risk. The
reward-to-risk ratio of the market portfolio.


Market risk

risk that cannot be diversified away. Related: systematic risk


Market Risk

The amount of total risk that cannot be eliminated by portfolio
diversification. The risk inherent in the general economy as a
whole. Also known as systemic risk.


market risk

Economywide (macroeconomic) sources of risk that affect the overall stock market. Also called systematic risk.


Market Risk

The part of security's risk that cannot be eliminated by diversification. It is measured by the beta coefficient.


market risk premium

risk premium of market portfolio. Difference between market return and return on risk-free Treasury bills.


Mortgage

A loan secured by the collateral of some specified real estate property which obliges the borrower
to make a predetermined series of payments.


Mortgage

Debt instrument by which the borrower (mortgagor) gives the lender (mortgagee) a lien on property as security for the repayment of a loan.


Mortgage-backed securities

Securities backed by a pool of mortgage loans.


Mortgage-Backed Securities Clearing Corporation

A wholly owned subsidiary of the Midwest Stock
Exchange that operates a clearing service for the comparison, netting, and margining of agency-guaranteed
MBSs transacted for forward delivery.


Mortgage bond

A bond in which the issuer has granted the bondholders a lien against the pledged assets.
Collateral trust bonds


Mortgage (Credit Insurance)

An agreement between a creditor and a borrower, where the creditor has loaned an amount to the borrower for purposes of purchasing a loan secured by a home.


Mortgage duration

A modification of standard duration to account for the impact on duration of MBSs of
changes in prepayment speed resulting from changes in interest rates. Two factors are employed: one that
reflects the impact of changes in prepayment speed or price.


Mortgage Insurance

Commonly sold in the form of reducing term life insurance by lending institutions, this is life insurance with a death benefit reducing to zero over a specific period of time, usually 20 to 25 years. In most instances, the cost of coverage remains level, while the death benefit continues to decline. Re-stated, the cost of this kind of insurance is actually increasing since less death benefit is paid as the outstanding mortgage balance decreases while the cost remains the same. Lending institutions are the most popular sources for this kind of coverage because it is usually sold during the purchase of a new mortgage. The untrained institution mortgage sales person often gives the impression that this is the only place mortgage insurance can be purchased but it is more efficiently purchased at a lower cost and with more flexibility, directly from traditional life insurance companies. No matter where it is purchased, the reducing term insurance death benefit reduces over a set period of years. Most consumers are up-sizing their residences, not down-sizing, so it is likely that more coverage is required as years pass, rather than less coverage.
The cost of mortgage lender's insurance group coverage is based on a blended non-smoker/smoker rate, not having any advantage to either male or female. mortgage lender's group insurance certificate specifies that it [the lender] is the sole beneficiary entitled to receive the death benefit. mortgage lender's group insurance is not portable and is not guaranteed. Generally speaking, your coverage is void if you do not occupy the house for a period of time, rent the home, fall into arrears on the mortgage, and there are a few others which vary by institution. If, for example, you sell your home and buy another, your current mortgage insurance coverage ends and you will have to qualify for new coverage when you purchase your next home. Maybe you won't be able to qualify. Not being guaranteed means that it is possible for the lending institution's group insurance carrier to cancel all policy holder's coverages if they are experiencing too many death benefit claims.
mortgage insurance purchased from a life insurance company, is priced, based on gender, smoking status, health and lifestyle of the purchaser. Once obtained, it is a unilateral contract in your favour, which cannot be cancelled by the insurance company unless you say so or unless you stop paying for it. It pays upon the death of the life insured to any "named beneficiary" you choose, tax free. If, instead of reducing term life insurance, you have purchased enough level or increasing life insurance coverage based on your projection of future need, you can buy as many new homes in the future as you want and you won't have to worry about coverage you might loose by renewing or increasing your mortgage.
It is worth mentioning mortgage creditor protection insurance since it is many times mistakenly referred to simply as mortgage insurance. If a home buyer has a limited amount of down payment towards a substantial home purchase price, he/she may qualify for a high ratio mortgage on a home purchase if a lump sum fee is paid for mortgage creditor protection insurance. The only Canadian mortgage lenders currently known to offer this option through the distribution system of banks and trust companies, are General Electric Capital [GE Capital] and Central mortgage and Housing Corporation [CMHC]. The lump sum fee is mandatory when the mortgage is more than 75% of the value of the property being purchased. The lump sum fee is usually added onto the mortgage. It's important to realize that the only beneficiary of this type of coverage is the morgage lender, which is the bank or trust company through which the buyer arranged their mortgage. If the buyer for some reason defaults on this kind of high ratio mortgage and the value of the property has dropped since being purchased, the mortgage creditor protection insurance makes certain that the bank or trust company gets paid. However, this is not the end of the story, because whatever the difference is, between the disposition value of the property and whatever sum of unpaid mortgage money is outstanding to either GE Capital or CMHC will be the subject of collection procedures against the defaulting home buyer. Therefore, one should conclude that this kind of insurance offers protection only to the bank or trust company and absolutely no protection to the home buyer.


Mortgage Life insurance (Credit Insurance)

Decreasing term life insurance that provides a death benefit amount corresponding to the decreasing amount owed on a mortgage.


Mortgage pass-through security

Also called a passthrough, a security created when one or more mortgage
holders form a collection (pool) of mortgages sells shares or participation certificates in the pool. The cash
flow from the collateral pool is "passed through" to the security holder as monthly payments of principal,
interest, and prepayments. This is the predominant type of MBS traded in the secondary market.


Mortgage pipeline

The period from the taking of applications from prospective mortgage borrowers to the
marketing of the loans.


Mortgage rate

The interest rate on a mortgage loan.


Mortgagee

The lender of a loan secured by property.


Mortgager

The borrower of a loan secured by property.


Nondiversifiable risk

risk that cannot be eliminated by diversification.


Nonsystematic risk

Nonmarket or firm-specific risk factors that can be eliminated by diversification. Also
called unique risk or diversifiable risk. Systematic risk refers to risk factors common to the entire economy.


Open-end mortgage

mortgage against which additional debts may be issued. Related: closed-end mortgage.


Operating risk

The inherent or fundamental risk of a firm, without regard to financial risk. The risk that is
created by operating leverage. Also called business risk.


operating risk (business risk)

risk in firm’s operating income.


Overnight delivery risk

A risk brought about because differences in time zones between settlement centers
require that payment or delivery on one side of a transaction be made without knowing until the next day
whether the funds have been received in an account on the other side. Particularly apparent where delivery
takes place in Europe for payment in dollars in New York.


Political risk

Possibility of the expropriation of assets, changes in tax policy, restrictions on the exchange of
foreign currency, or other changes in the business climate of a country.


Price risk

The risk that the value of a security (or a portfolio) will decline in the future. Or, a type of
mortgage-pipeline risk created in the production segment when loan terms are set for the borrower in advance
of terms being set for secondary market sale. If the general level of rates rises during the production cycle, the
lender may have to sell his originated loans at a discount.


Product risk

A type of mortgage-pipeline risk that occurs when a lender has an unusual loan in production or
inventory but does not have a sale commitment at a prearranged price.


Purchasing-power risk

Related: inflation risk


RAMs (Reverse-annuity mortgages)

mortgages in which the bank makes a loan for an amount equal to a
percentage of the appraisal value of the home. The loan is then paid to the homeowner in the form of an
annuity.


Rate risk

In banking, the risk that profits may decline or losses occur because a rise in interest rates forces up
the cost of funding fixed-rate loans or other fixed-rate assets.


Regulatory pricing risk

risk that arises when regulators restrict the premium rates that insurance companies
can charge.


Reinvestment risk

The risk that proceeds received in the future will have to be reinvested at a lower potential
interest rate.


REMIC (real estate mortgage investment conduit)

A pass-through tax entity that can hold mortgages
secured by any type of real property and issue multiple classes of ownership interests to investors in the form
of pass-through certificates, bonds, or other legal forms. A financing vehicle created under the Tax Reform
Act of 1986.


Residual risk

Related: unsystematic risk


Reverse price risk

A type of mortgage-pipeline risk that occurs when a lender commits to sell loans to an
investor at rates prevailing at application but sets the note rates when the borrowers close. The lender is thus
exposed to the risk of falling rates.


Risk

Typically defined as the standard deviation of the return on total investment. Degree of uncertainty of
return on an asset.


risk

uncertainty; it reflects the possibility of differences between
the expected and actual future returns from an investment


Risk

The degree of uncertainty associated with the return on an asset.


Risk

A state in which the number of possible future events exceeds the number of events that will actually occur, and some measure of probability can be attached to them.


risk

risk measures the possibility that your investment may lose or gain value as compared to the expected rate of return. risk is different from uncertainty, which is not measurable.


Risk

Calculated chance of loss.


Risk-adjusted

return Return earned on an asset normalized for the amount of risk associated with that asset.


risk-adjusted discount rate method

a formal method of adjusting for risk in which the decision maker increases the rate used for discounting the future cash flows to compensate for increased risk



 

 

 

 

 

 

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