CMB - Certified Mortgage Banker Capital Markets and Hedging Strategies Questions and Answers Flashcards
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What is a Mortgage Servicing Right (MSR) and why does it have value?
Answer: The contractual right to collect loan payments and service a mortgage in exchange for a servicing fee
An MSR is the right to service a mortgage loan, earned by collecting monthly payments, managing escrow, and handling investor reporting in exchange for a servicing fee (typically 25–50 bps annually on the unpaid principal balance).
How do rising interest rates generally affect the value of Mortgage Servicing Rights (MSRs)?
Answer: Rising rates increase MSR value because prepayments slow, extending the life of the servicing cash flows
When rates rise, borrowers have less incentive to refinance, so loans stay on the books longer, extending the stream of servicing fee income and increasing MSR value.
What is the difference between 'servicing released' and 'servicing retained' loan sales?
Answer: Servicing released means the lender transfers the MSR to the buyer; servicing retained means the lender keeps the MSR and continues servicing the loan
In a servicing released sale, the lender sells both the loan and the MSR to the investor; in a servicing retained sale, the lender sells the loan but keeps the servicing rights and continues to collect payments.
What is a 'warehouse line of credit' and how does it function in mortgage banking?
Answer: A short-term revolving credit facility that funds mortgage loans between origination and sale to investors
A warehouse line is a short-term revolving credit facility provided by banks that allows mortgage lenders to fund loans at closing; the line is repaid when the loan is sold to an investor, typically within 15–30 days.
What is 'basis risk' in mortgage banking hedging programs?
Answer: The risk that the hedge instrument (e.g., TBA MBS) does not move in perfect correlation with the loans being hedged
Basis risk arises when TBA MBS prices and the prices of the actual loans in the pipeline diverge due to coupon, credit quality, or geographic differences, causing the hedge to be imperfect.
What is a 'commitment fee' in the context of mortgage secondary market transactions?
Answer: A fee paid by the lender to secure a mandatory or best-efforts delivery commitment with an investor
A commitment fee is paid by a lender to an investor or broker-dealer to secure the right to deliver loans at an agreed price, compensating the investor for reserving capital and managing the associated rate risk.