CMB Mortgage Risk Management 2

Question 1

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?

Accepted Answer

Interest rate (price) risk on the locked loan

Answer

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.

Question 2

In pipeline management, what does the term 'pull-through rate' measure?

Accepted Answer

The percentage of rate-locked loans expected to actually close and fund

Answer

Pull-through is the expected percentage of locked loans that will close, and it drives how much of the pipeline gets hedged.

Question 3

Which instrument do mortgage bankers most commonly use to hedge a pipeline of locked conforming fixed-rate loans?

Accepted Answer

Forward sales of TBA agency MBS

Answer

Selling TBA MBS forward offsets value losses on locked conforming loans if rates rise.

Question 4

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?

Accepted Answer

It is over-hedged and loses on its short TBA positions

Answer

Higher fallout leaves the lender short more TBAs than loans it can deliver, so it loses on the hedge when prices rise.

Question 5

What is the main risk trade-off a lender makes when selling loans on a best-efforts basis instead of a mandatory delivery basis?

Accepted Answer

It shifts fallout risk to the investor in exchange for a lower price

Answer

Under best efforts the lender only delivers loans that close, so the investor carries fallout risk and pays less for that option.

CMB - Certified Mortgage Banker Practice Test

CMB - Certified Mortgage Banker Practice Test

CMB Mortgage Risk Management 2