Fallout Risk (can also be refereed to a borrower fallout) is a type of a mortgage period risk that occurs when the terms of the loan are provided concurrently with the terms of a property sale. The risk lies in the fact that one of the parties, either borrower or investor, won’t sign a credit agreement and the loan will “fall” from the period.
Usually, fallout risk occurs when another deal, such as the sale of a real estate asset can influence the formulation of a mortgage transaction.
In such cases, the lender’s pipeline can fall out, if the deal doesn’t happen. Risk also occurs when lenders give a right but not an obligation to cancel the deal. There are certain factors that influence fallout risk. Among these factors is a change in interest rate. The change of interest rate also influences the percentage of loans that will close.
As a part of fa lending process, fallout risk is hard to avoid because of the 60-day requirement and the chance of borrower withdrawal during that time. Obviously, lenders can predict a fallout risk and use some hedging strategies to soften it or even omit. Lenders can create a hedge against mortgage fallout to make try avoid losses.
One more thing to keep in mind: if interest rate increases, more loans will more likely close and the lenders will be forced to accept unprofitable conditions.