Portfolio Management & Strategy Flashcards
7 cards from real CRU practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Portfolio Management & Strategy flashcards as text
A lender has a large portfolio of adjustable-rate mortgages set to reprice next year. Rising interest rates would most likely cause:
Answer: Payment shock for borrowers if their income has not kept pace with rate increases
When ARM rates reset higher, borrowers whose income hasn't grown proportionally may experience payment shock, increasing the risk of delinquency and default.
Which of the following is the best indicator of a residential mortgage portfolio's credit risk trend worsening over time?
Answer: Rising roll rates from 30-day to 60-day delinquency buckets
Roll rates measure how frequently loans migrate from one delinquency stage to a more severe one; rising roll rates signal accelerating credit deterioration.
An institution's residential mortgage portfolio strategy calls for a 'barbell approach.' This typically means:
Answer: Holding a mix of very short-duration and very long-duration loans while avoiding the middle range
A barbell strategy combines short-duration and long-duration assets to manage interest rate risk while avoiding intermediate maturities, balancing liquidity and yield.
In residential mortgage portfolio management, what is the purpose of maintaining a 'watch list'?
Answer: Monitoring loans showing early signs of stress that may deteriorate into non-performing status
A watch list flags loans with emerging risk indicators—such as increasing LTV, borrower financial stress, or early delinquency—so management can intervene before losses occur.
A portfolio underwriter is comparing two strategies: retaining mortgages vs. originate-to-distribute. The primary advantage of originate-to-distribute is:
Answer: Faster capital recycling enabling higher origination volume without balance sheet growth
Originate-to-distribute allows lenders to sell loans and recover capital quickly, enabling them to originate more loans without increasing balance sheet exposure.
When a residential mortgage portfolio undergoes a 'stress test' for a severe recession scenario, which combination of inputs is most relevant?
Answer: Declining property values, rising unemployment, and tightening credit spreads
Recession stress tests model adverse conditions including falling home prices, rising unemployment (driving defaults), and potential spread widening that compound portfolio losses.
A CRU candidate is evaluating a portfolio's weighted average maturity (WAM). Which scenario would cause WAM to shorten over time even without new originations?
Answer: Natural amortization and scheduled principal payments reducing remaining loan terms
As existing loans age and borrowers make scheduled payments, the remaining term on each loan decreases, naturally shortening the portfolio's weighted average maturity.