CMB - Certified Mortgage Banker Capital Markets and Hedging Strategies Questions and Answers Flashcards
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What is a Mortgage-Backed Security (MBS) and who issues agency MBS in the United States?
Answer: A security backed by a pool of mortgage loans; issued by Fannie Mae, Freddie Mac, and Ginnie Mae
Agency MBS are securities backed by pools of conforming mortgage loans, guaranteed by Fannie Mae, Freddie Mac (GSEs), or Ginnie Mae (backed by the full faith and credit of the U.S. government).
What is 'pipeline risk' in mortgage banking capital markets?
Answer: The interest rate risk that accumulates between loan application and loan sale in the secondary market
Pipeline risk is the exposure a mortgage lender has to interest rate movements between the time a borrower locks a rate and when the loan is eventually sold to an investor.
Which hedging instrument is most commonly used by mortgage bankers to hedge pipeline and warehouse interest rate risk?
Answer: To-Be-Announced (TBA) forward MBS contracts
TBA (To-Be-Announced) forward MBS contracts are the primary hedging tool for mortgage bankers because they allow lenders to pre-sell mortgage pools at a locked price before the loans are closed.
What does 'best efforts' delivery mean in the context of mortgage loan sales to investors?
Answer: The lender commits to deliver a loan only if it closes, with no penalty for fallout
Under a best efforts commitment, the lender promises to deliver a specific loan to an investor only if that loan actually closes, so there is no pair-off fee if the loan falls out of the pipeline.
What is 'mandatory delivery' in mortgage secondary market transactions and what risk does it create for lenders?
Answer: A commitment where the lender must deliver a specified volume of loans or pay a pair-off fee
Mandatory delivery commits the lender to deliver a specified volume of loans at an agreed price; if fewer loans close than committed, the lender must pay a pair-off fee to the investor.
What is a 'pair-off fee' in mortgage capital markets?
Answer: A penalty paid by a lender when it fails to deliver the committed loan volume under a mandatory delivery agreement
A pair-off fee is a penalty assessed against a mortgage lender when it cannot fulfill a mandatory delivery commitment, calculated based on the market movement from the original trade price.