The structure of the MBS markets has long reflected the practices of both originators and borrowers in the primary mortgage market. This discussion is facilitated by a brief overview of the timeline of a mortgage loan, illustrated in Exhibit 2.4
. A loan begins as an application, which may either be associated with a designated rate (making the loan “locked” or “committed”) or carried as a floating rate obligation (to be locked at a point prior to funding). Borrowers that lock their loan at the time of application pay slightly more for their loans (in terms of either a rate differential or slightly higher fees) to account for the cost of hedging the loan for the period between application and funding. Most importantly, there is a lag between the points in time when borrowers apply for their loans and the loans are funded that lenders must take into account in managing their book of business, or pipeline
. This lag reflects the time necessary for lenders to underwrite the loan and process the paperwork, which includes appraisals, title searches and insurance, geological and flood surveys, and credit analysis. In addition, purchase transactions often require additional time to process and register the underlying real estate transaction.
Timeline of Loan From Application to Agency Pooling
The lag between application and funding, which varies depending on ...