Chapter 28 — Exercises

How to use these. Work them in order; they are graduated. Items marked † have worked solutions in the answers appendix — do them last and do them honestly, without looking. Everything you need is in this chapter, in Chapter 2 (history), or in Chapter 14 (guidelines and warranties).

All dollar figures come from the Linden Street file: \$365,750.00 at 6.625%, 30-year fixed, 95% loan-to-value, 706 representative score, funded day 51, first payment December 1, P&I \$2,341.94**, first-month interest **\$2,019.24 and principal \$322.70, PITI + MI \$3,033.72**, total interest over the term **\$477,348.40. The chapter's illustrative execution assumptions — a 0.250% servicing fee, a 0.375% guarantee fee, and therefore a 6.000% pass-through coupon — apply unless an item says otherwise. Every one of those is a constructed teaching figure; real pricing and real fees change, and you must verify current values at the source.

A. Recall and definitions

  1. In one sentence each, state what Fannie Mae does, what Freddie Mac does, and what Ginnie Mae does. Use the verb that distinguishes them.

  2. Which of the three carries the full faith and credit of the United States, and which two do not? Name the regulator or parent department of each.

  3. Name the two components of a guarantee fee and say which one the borrower experiences as an adjustment on a rate sheet.

  4. Define the pass-through rate, then write the formula connecting it to the note rate.

  5. What does a document custodian do, and why must it be a third party rather than the lender?

  6. List the six things a TBA trade specifies. Then name the one important thing it does not specify.

  7. Distinguish "servicing released" from "servicing retained" in one sentence each, and say which one produces an asset on the lender's balance sheet.

  8. Give two reasons unrelated to credit quality that a perfectly good loan might be non-agency.

  9. † In a private-label structure nobody guarantees anything. Name the mechanism that allocates credit losses instead, and describe how it works in two sentences.

B. Applied reasoning

  1. A new loan officer says: "Fannie Mae denied my borrower." Rewrite the sentence so it is accurate and name every party whose decision is actually being described.

  2. † The chapter says the investor "pays a premium for the pool precisely because it cannot tell the loans apart." Explain what that sentence means, then explain what it implies about the value of your documentation work. Do not use the word "compliance."

  3. Explain why a Ginnie Mae issuer must advance a scheduled payment to certificateholders even when the borrower has not paid, and what Ginnie Mae's guarantee is actually protecting in that moment.

  4. Your borrower has a 706 representative score at 95% loan-to-value. Trace the causal chain, in order, from that pair of facts to the number on their Loan Estimate. Name at least four links.

  5. A colleague argues that because the GSEs are in conservatorship, agency MBS are effectively government-backed and the Ginnie Mae distinction is academic. Give the strongest version of their argument, then say precisely where it is legally wrong.

  6. † Why does the existence of the TBA market make a thirty-day rate lock possible? Answer in a single paragraph a real estate agent could follow, without using the words "hedge" or "convexity."

  7. Post-closing finds that a required disclosure on a funded loan was delivered one day outside its window. The loan is otherwise perfect. Using this chapter's chain of parties, explain why this is a financial problem and not merely a compliance problem.

  8. Explain to a first-year loan officer why an agency guideline and a lender overlay call for completely different escalation strategies. Say what you would actually do in each case.

  9. Rates fall 150 basis points. Describe what happens, in the same quarter, to (a) your company's origination volume, (b) its margins, and (c) the value of its servicing book — and explain why a company that does both is more stable than one that does only one.

C. Run the numbers

  1. Split the Linden Street first-month interest of \$2,019.24 three ways using the chapter's illustrative stack. Show each strip in dollars, then as a percentage of the interest, and confirm the percentages sum to 100.00%.

  2. † The three rounded strips in the previous item do not sum exactly to \$2,019.24. Show why, to four decimal places, and state in one sentence what a loan officer should conclude when a remittance reconciliation is off by a penny.

  3. Compute the annualized guarantee fee at the opening balance. Then compute the actual first-year guarantee fee using the canonical twelve-month balance of \$361,757.88, and explain the difference between the two answers.

  4. A lender sells the loan whole, servicing released, at a price of 101.500. Compute the proceeds and the gain over par.

  5. † The same lender instead delivers the loan into a 6.000% security priced at 100-19 and retains servicing valued at 112.5 basis points of balance. Compute total economic value, the gain over par, and the difference against the whole-loan execution in Exercise 22. Then prove your answer a second way, working in points rather than dollars.

  6. † The MSR on this loan is marked at 4.5× (112.5 basis points). Rates fall 100 basis points and the multiple compresses to 3.25×; rates rise 100 basis points instead and it extends to 5.25×. Compute the dollar value in each scenario and the change from today's mark. Then state, with the arithmetic, which move is larger and by what ratio — and explain in one sentence why the two are not symmetric.

  7. A servicer holds 100,000 loans averaging \$365,750 with an MSR mark of 112.5 basis points. Value the book. Then value it after the 100-basis-point rally in Exercise 24, and state the loss in dollars and as a percentage.

  8. † A capital markets desk sells \$3,000,000 par of a 6.000% security at a price of 100-24 for forward settlement. Compute the estimated proceeds. Then compute what percentage of that ticket the Linden Street loan represents, and say what that percentage tells you about how the desk thinks about your file.

  9. Over the full term the loan generates \$477,348.40 of total interest. Using the chapter's illustrative stack, compute the total dollars going to the guarantee fee and to the servicing fee over thirty years — then state the one large assumption that makes both figures wrong in practice.

D. Read the document and find the problem

  1. You are handed a pool disclosure summary showing: 30-year fixed, 6.500% pass-through rate, weighted average note rate 6.240%, 88 loans, \$31,400,000 original face. Something is structurally impossible. Identify it and explain why.

  2. † A trade ticket reads: SELL · 30-year Uniform MBS · 6.000% coupon · settlement November · par \$3,000,000 · price 100-24. A new hire asks which of the company's closed loans are on the ticket. Answer them, then explain what the ticket commits the company to and what it does not.

  3. A servicing valuation memo says: "Given the rally in rates this quarter, we have marked the MSR book up by 9%." Identify the error, explain which direction the mark should have gone, and give the one-sentence reason.

E. Write it

  1. Write the two-paragraph letter you would send to a past borrower who has just received a servicing transfer notice. It must state what changed, what cannot change, what protection they have, and one concrete action. If the words "securitization," "pass-through," or "certificateholder" appear, rewrite it.

  2. † Write the internal memo you would send to your branch manager arguing for or against retaining servicing on a specific niche of your production. Use the chapter's arithmetic. Address cash today versus asset value, and address what happens to your argument if rates fall 150 basis points.

  3. Draft the ninety-second explanation you would give a real estate agent who asks, "Why does your underwriter care so much about a \$4,900 deposit?" Your answer must reach the investor and come back, and must not blame the underwriter.

F. Judgment

  1. A borrower says they will only work with you if you guarantee their loan will never be sold. Write out exactly what you say. Then say what you would do if your branch manager told you to promise it anyway.

  2. † Your company's capital markets desk decides to stop retaining servicing on all production. Nothing about your borrowers changes and nothing about your commission changes. List three things that nevertheless change about your job, and one thing you should now say differently at application.

G. NMLS-style exam questions

  1. Which entity does not purchase mortgage loans? (A) Fannie Mae (B) Freddie Mac (C) Ginnie Mae (D) a correspondent aggregator

  2. A security backed by a pool of FHA and VA loans, issued by an approved private issuer, is guaranteed by which entity — and with what backing?

  3. † A candidate reads: "Which agency purchases FHA and VA loans and issues mortgage-backed securities backed by them?" Explain why this stem is a trap, what the correct response is, and what single word in the stem should have warned the candidate.

H. The Loan File — trace this loan

  1. † Trace the loan. Starting at the closing table on day 51 and ending with the December 25 payment to certificateholders, list every step and every party the Linden Street loan passes through. For each step write one sentence: what happens here, and who would be harmed if it did not. Then answer, in one sentence each:

    • Where did the money at the closing table come from?
    • Who owns the debt six months later?
    • Who do the borrowers pay, and is that the same party?
    • What is the recorded lien doing during all of this?

    Finally, route the borrowers' December 1 payment of \$3,033.72 to named destinations — the P&I split three ways, plus escrow and mortgage insurance — confirm the column foots, and explain the one-cent artifact.

  2. Suppose your employer had instead sold this loan whole and servicing released on day 60. Write the paragraph you would add to your February call with these borrowers that you would not have said under the servicing-retained outcome — and name the chapter that governs the notices they receive.