What is Mortgage Fallout?

Mortgage fallout refers to the instance of proposed loans falling through before closing.

This is something tracked by not only mortgage producers and their mortgage companies, but also economists who keep up with mortgages and the secondary market for mortgage derivatives. Since mortgages take two months or more to close, the fallout rate can indicate a stagnancy in the economy and trouble for the secondary mortgage market.

For mortgage brokers, mortgage companies, and those in the secondary mortgage market, fallout rate and fallout ratio can be important numbers. From one perspective, this is a production-oriented statistic that gives them an idea of how many clients they are failing to close after a mortgage rate has been offered.

It could also be that mortgage lenders have become skittish and are denying applications midway through the process. High fallout rates can be bad for consumers and mortgage companies.

This also has implications on the flip-side of the mortgage industry, where mortgage loans and their cash flows are bought and sold in the secondary mortgage market, where Collateralized Mortgage Obligations and other derivatives securities are created and sold. They base their positions, hedges, pricing, and interest rates on many sources of information, among which fallout rate is one of the most important.

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