Portfolio Management & Strategy Flashcards

An underwriter is reviewing a portfolio strategy that targets jumbo non-conforming loans exclusively. Which is the primary portfolio-level concern with this approach?

Answer: Inability to sell or securitize loans through GSE channels, limiting liquidity

Non-conforming jumbo loans cannot be sold to GSEs like Fannie Mae or Freddie Mac, so the lender must rely on private secondary market outlets or retain loans on balance sheet, reducing liquidity options.

In the context of residential mortgage portfolio performance, what does 'loss severity' measure?

Answer: The proportion of outstanding principal lost after foreclosure and property liquidation

Loss severity is the percentage of the outstanding loan balance that is ultimately unrecovered after foreclosure costs, sales discounts, and expenses are deducted.

A portfolio manager is evaluating the impact of a 200 basis point interest rate increase on the portfolio's market value. This analysis is best described as:

Answer: Duration and convexity analysis for rate sensitivity

Duration and convexity analysis measures how much the market value of a mortgage portfolio changes in response to interest rate shifts.

Which portfolio strategy involves retaining high-balance loans on the balance sheet while selling conforming loans to the secondary market?

Answer: Retained portfolio strategy for jumbos

Many institutions retain jumbo non-conforming loans on their balance sheet because they cannot be sold to GSEs, while offloading conforming loans to manage capital and liquidity.

When assessing portfolio credit quality trends over time, an underwriter uses 'vintage analysis.' What does this technique primarily examine?

Answer: Delinquency and loss performance of loan cohorts grouped by origination year

Vintage analysis groups loans by the year they were originated and tracks how each cohort performs over time, revealing underwriting quality trends and economic cycle effects.

A residential mortgage portfolio manager decides to implement a 'portfolio rebalancing' strategy. In this context, rebalancing most likely involves:

Answer: Adjusting the mix of loan products, maturities, or credit grades to align with target risk parameters

Portfolio rebalancing realigns the composition of loan types, credit quality tiers, or duration profiles to maintain the risk-return profile established in the portfolio strategy.

Under Basel III capital framework, which type of residential mortgage loan generally receives the most favorable risk weight for capital purposes?

Answer: Well-collateralized owner-occupied loans with low LTV and full documentation

Basel III assigns lower risk weights to prudently underwritten, owner-occupied, first-lien mortgage loans with conservative LTVs, reflecting their historically low default rates.