Mortgage Risk Management Flashcards
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Read the first 7 Mortgage Risk Management flashcards as text
After a lender issues a rate lock to a borrower but before the loan is sold, which risk is the lender most directly exposed to?
Answer: Interest rate (price) risk on the locked loan
If market rates rise after the lock, the loan's sale value falls, so the locked pipeline carries price risk until it is sold or hedged.
In pipeline management, what does the term 'pull-through rate' measure?
Answer: The percentage of rate-locked loans expected to actually close and fund
Pull-through is the expected percentage of locked loans that will close, and it drives how much of the pipeline gets hedged.
Which instrument do mortgage bankers most commonly use to hedge a pipeline of locked conforming fixed-rate loans?
Answer: Forward sales of TBA agency MBS
Selling TBA MBS forward offsets value losses on locked conforming loans if rates rise.
Rates drop sharply and many locked borrowers walk away to relock elsewhere. A lender that hedged using a fixed pull-through assumption is most likely to face which problem?
Answer: It is over-hedged and loses on its short TBA positions
Higher fallout leaves the lender short more TBAs than loans it can deliver, so it loses on the hedge when prices rise.
What is the main risk trade-off a lender makes when selling loans on a best-efforts basis instead of a mandatory delivery basis?
Answer: It shifts fallout risk to the investor in exchange for a lower price
Under best efforts the lender only delivers loans that close, so the investor carries fallout risk and pays less for that option.
A lender commits to deliver $5 million in loans under a mandatory commitment but can deliver only $4 million. What typically settles the shortfall?
Answer: A pair-off fee based on the market price change
Undelivered mandatory volume is usually paired off, and the lender pays any adverse price change.
In interest rate risk management, what does duration measure for a mortgage asset or hedge position?
Answer: The sensitivity of its price to changes in interest rates
Duration estimates the percentage price change for a given change in yield, which is how hedge ratios are sized.