CMB - Certified Mortgage Banker Capital Markets and Hedging Strategies Questions and Answers Flashcards

What does 'duration' measure in the context of mortgage-backed securities?

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.

What is 'negative convexity' in mortgage-backed securities and why does it occur?

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.

What is a 'pull-through rate' and why is it critical for hedging mortgage pipelines?

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.

What is a Collateralized Mortgage Obligation (CMO) and how does it differ from a pass-through MBS?

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.

What is the 'gain on sale' in mortgage banking and how is it calculated?

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.

What is a 'whole loan sale' and how does it differ from securitization?

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.