CMB CMB - Certified Mortgage Banker Capital Markets and Hedging Strategies Questions and Answers 2

Question 1

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

Accepted Answer

The price sensitivity of an MBS to changes in interest rates

Answer

The stated maturity date of the underlying mortgage loans

Answer

The average remaining balance of loans in a pool

Answer

The time it takes to securitize a pool of loans

Question 2

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

Accepted Answer

The tendency of MBS to underperform standard bonds in both rising and falling rate environments due to prepayment risk

Answer

A pricing discount applied to MBS with high delinquency rates

Answer

A penalty for late MBS pool delivery to Fannie Mae

Answer

The inverse relationship between coupon rates and default probability

Question 3

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

Accepted Answer

The percentage of rate locks that actually close and fund

Answer

The speed at which loans are processed through underwriting

Answer

The ratio of conforming to non-conforming loans in a pipeline

Answer

The percentage of MBS pools delivered on time to investors

Question 4

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

Accepted 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

Answer

A CMO is a government guarantee program; a pass-through MBS is privately issued

Answer

A CMO is backed only by commercial mortgages; a pass-through is backed by residential loans

Answer

A CMO is a floating-rate instrument; a pass-through is always fixed-rate

Question 5

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

Accepted Answer

The difference between the loan sale proceeds and the origination cost basis, including servicing release premium

Answer

The profit from selling REO properties acquired through foreclosure

Answer

The revenue generated from late fees collected on serviced loans

Answer

The markup charged to borrowers above the lender's cost of funds

Question 6

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

Accepted Answer

A whole loan sale sells individual loans directly to investors; securitization pools loans into securities sold in capital markets

Answer

A whole loan sale is only used for commercial mortgages; securitization is only for residential loans

Answer

A whole loan sale retains servicing rights; securitization always releases servicing

Answer

A whole loan sale is a government program; securitization is private only