CMB CMB - Certified Mortgage Banker Capital Markets and Hedging Strategies Questions and Answers 2 — Questions and Answers
Question 1: What does 'duration' measure in the context of mortgage-backed securities?
- The stated maturity date of the underlying mortgage loans
- The price sensitivity of an MBS to changes in interest rates (Correct answer)
- The average remaining balance of loans in a pool
- The time it takes to securitize a pool of loans
Correct answer: The price sensitivity of an MBS to changes in interest rates
Duration measures how much an MBS price will change for a given change in interest rates; a higher duration means greater price sensitivity to rate movements.
Question 2: What is 'negative convexity' in mortgage-backed securities and why does it occur?
- A pricing discount applied to MBS with high delinquency rates
- The tendency of MBS to underperform standard bonds in both rising and falling rate environments due to prepayment risk (Correct answer)
- A penalty for late MBS pool delivery to Fannie Mae
- The inverse relationship between coupon rates and default probability
Correct answer: The tendency of MBS to underperform standard bonds in both rising and falling rate environments due to prepayment risk
Negative convexity occurs because when rates fall, borrowers prepay their mortgages, capping the MBS price appreciation; when rates rise, prepayments slow, extending the security's duration and increasing losses.
Question 3: What is a 'pull-through rate' and why is it critical for hedging mortgage pipelines?
- The percentage of rate locks that actually close and fund (Correct answer)
- The speed at which loans are processed through underwriting
- The ratio of conforming to non-conforming loans in a pipeline
- The percentage of MBS pools delivered on time to investors
Correct answer: The percentage of rate locks that actually close and fund
Pull-through rate is the percentage of locked loans that ultimately close, and it determines the hedge ratio a lender uses to avoid over- or under-hedging its pipeline.
Question 4: What is a Collateralized Mortgage Obligation (CMO) and how does it differ from a pass-through MBS?
- A CMO is a government guarantee program; a pass-through MBS is privately issued
- A CMO restructures cash flows from mortgage pools into tranches with different maturities and risk profiles; a pass-through distributes cash flows pro rata to all investors (Correct answer)
- A CMO is backed only by commercial mortgages; a pass-through is backed by residential loans
- A CMO is a floating-rate instrument; a pass-through is always fixed-rate
Correct answer: A CMO restructures cash flows from mortgage pools into tranches with different maturities and risk profiles; a pass-through distributes cash flows pro rata to all investors
A CMO divides mortgage pool cash flows into separate tranches with distinct maturities, prepayment profiles, and risk levels, while a standard pass-through distributes all principal and interest payments equally to all certificate holders.
Question 5: What is the 'gain on sale' in mortgage banking and how is it calculated?
- The profit from selling REO properties acquired through foreclosure
- The difference between the loan sale proceeds and the origination cost basis, including servicing release premium (Correct answer)
- The revenue generated from late fees collected on serviced loans
- The markup charged to borrowers above the lender's cost of funds
Correct answer: The difference between the loan sale proceeds and the origination cost basis, including servicing release premium
Gain on sale (GOS) is the profit realized when a mortgage lender sells a funded loan, calculated as sale price (including SRP) minus the funded loan amount and origination costs.
Question 6: What is a 'whole loan sale' and how does it differ from securitization?
- A whole loan sale sells individual loans directly to investors; securitization pools loans into securities sold in capital markets (Correct answer)
- A whole loan sale is only used for commercial mortgages; securitization is only for residential loans
- A whole loan sale retains servicing rights; securitization always releases servicing
- A whole loan sale is a government program; securitization is private only
Correct answer: A whole loan sale sells individual loans directly to investors; securitization pools loans into securities sold in capital markets
In a whole loan sale, the lender sells individual mortgage loans directly to an investor, while securitization pools multiple loans together and issues securities backed by those pools to capital market investors.
CMB CMB - Certified Mortgage Banker Capital Markets and Hedging Strategies Questions and Answers 2
What does 'duration' measure in the context of mortgage-backed securities?