CMB CMB - Certified Mortgage Banker Capital Markets and Hedging Strategies Questions and Answers 1 — Questions and Answers
Question 1: What is a Mortgage-Backed Security (MBS) and who issues agency MBS in the United States?
- A short-term commercial paper issued by banks; issued by the Federal Reserve
- A security backed by a pool of mortgage loans; issued by Fannie Mae, Freddie Mac, and Ginnie Mae (Correct answer)
- A corporate bond backed by real estate collateral; issued by private banks
- A savings certificate backed by jumbo loans; issued by the FDIC
Correct answer: A security backed by a pool of mortgage loans; issued by Fannie Mae, Freddie Mac, and Ginnie Mae
Agency MBS are securities backed by pools of conforming mortgage loans, guaranteed by Fannie Mae, Freddie Mac (GSEs), or Ginnie Mae (backed by the full faith and credit of the U.S. government).
Question 2: What is 'pipeline risk' in mortgage banking capital markets?
- The risk of a loan officer's applications not converting to closings due to technology failures
- The interest rate risk that accumulates between loan application and loan sale in the secondary market (Correct answer)
- The risk of title defects discovered after a loan is funded
- The liquidity risk from holding MSRs on the balance sheet
Correct answer: The interest rate risk that accumulates between loan application and loan sale in the secondary market
Pipeline risk is the exposure a mortgage lender has to interest rate movements between the time a borrower locks a rate and when the loan is eventually sold to an investor.
Question 3: Which hedging instrument is most commonly used by mortgage bankers to hedge pipeline and warehouse interest rate risk?
- Credit Default Swaps (CDS)
- To-Be-Announced (TBA) forward MBS contracts (Correct answer)
- Treasury bond futures only
- Interest rate caps and floors
Correct answer: To-Be-Announced (TBA) forward MBS contracts
TBA (To-Be-Announced) forward MBS contracts are the primary hedging tool for mortgage bankers because they allow lenders to pre-sell mortgage pools at a locked price before the loans are closed.
Question 4: What does 'best efforts' delivery mean in the context of mortgage loan sales to investors?
- The lender guarantees delivery of the exact loans committed regardless of fallout
- The lender commits to deliver a loan only if it closes, with no penalty for fallout (Correct answer)
- The lender must deliver all loans at par with no pricing adjustment
- The lender delivers loans to the highest bidder regardless of prior commitments
Correct answer: The lender commits to deliver a loan only if it closes, with no penalty for fallout
Under a best efforts commitment, the lender promises to deliver a specific loan to an investor only if that loan actually closes, so there is no pair-off fee if the loan falls out of the pipeline.
Question 5: What is 'mandatory delivery' in mortgage secondary market transactions and what risk does it create for lenders?
- A requirement to deliver any loan that receives an AUS approval regardless of closing
- A commitment where the lender must deliver a specified volume of loans or pay a pair-off fee (Correct answer)
- A GSE rule requiring same-day funding for all conforming loans
- An investor requirement to accept all loans regardless of guidelines
Correct answer: A commitment where the lender must deliver a specified volume of loans or pay a pair-off fee
Mandatory delivery commits the lender to deliver a specified volume of loans at an agreed price; if fewer loans close than committed, the lender must pay a pair-off fee to the investor.
Question 6: What is a 'pair-off fee' in mortgage capital markets?
- A fee charged to borrowers for locking two loans simultaneously
- A penalty paid by a lender when it fails to deliver the committed loan volume under a mandatory delivery agreement (Correct answer)
- A charge assessed by GSEs for over-delivering on MBS pools
- A fee paid to the hedging desk for executing TBA trades
Correct answer: A penalty paid by a lender when it fails to deliver the committed loan volume under a mandatory delivery agreement
A pair-off fee is a penalty assessed against a mortgage lender when it cannot fulfill a mandatory delivery commitment, calculated based on the market movement from the original trade price.
CMB CMB - Certified Mortgage Banker Capital Markets and Hedging Strategies Questions and Answers 1
What is a Mortgage-Backed Security (MBS) and who issues agency MBS in the United States?