Chapter 29 — Exercises

Work these with a calculator and the constructed grids from the chapter: the base price column in Figure 29.1, the credit score / LTV matrix in Figure 29.2, and the lock period adjustment table in §29.5. All of those grids are constructed teaching tools and are not current pricing — the published matrices are revised periodically and were substantially restructured in 2023. Verify current values at the source before using any of this on a live file.

Items marked † have worked solutions in the answers appendix. No answers appear in this file.

A. Recall and definition

29.1 Define par in one sentence, and state the numeric price that corresponds to it.

29.2 Name the two deductions taken out of a note rate before the remainder reaches the holder of the security, and say who receives each.

29.3 State, from memory, the two formulas that convert a rate sheet price into a dollar figure.

29.4 † Rate sheets quote base pricing for a specific lock period. Explain why, and describe exactly what goes wrong for a loan officer who does not notice which period their sheet uses.

29.5 List six categories of loan-level price adjustment, and for each one name the fact about the file that determines it.

29.6 What risk does the "maximum price after all adjustments" line on a rate sheet protect the lender against? Answer in terms of borrower behavior, not accounting.

29.7 Define pull-through. State which direction it moves when rates improve, and why.

29.8 Before a pricing engine prices anything, it answers a different question first. What is that question, and why is its answer sometimes more useful than a price?

B. Price-to-dollar conversions

Drill these until they take under ten seconds each.

29.9 A file prices at 99.375 on a \$412,000 loan. State the points, the dollars, and whether the borrower is paying or receiving.

29.10 † A file prices at 101.250 on a \$248,500 loan. State the points, the dollars, and whether the borrower is paying or receiving.

29.11 A borrower pays \$4,725.00** in discount points on a **\$315,000 loan. What was the final price?

29.12 A borrower receives a \$1,912.50** lender credit on a **\$255,000 loan. What was the final price?

29.13 On the Linden Street loan amount of \$365,750, convert 0.375 point and 0.875 point to dollars.

29.14 † A file prices at 98.125. State the borrower's cost in points, and in dollars on a \$500,000 loan. Then state what final price would leave that borrower paying exactly \$5,000.00.

29.15 Which is better for the borrower — a price of 100.125 or a price of 99.875 — and by how many dollars on a \$300,000 loan?

29.16 A colleague says, "I got them a great price — 98.750." Explain in two sentences what is wrong with that sentence, and rewrite it so it says what the colleague probably meant.

C. Build the quote from a base price

Use the Figure 29.1 base price column, the Figure 29.2 matrix, and the §29.5 lock table. Show every line. State the final price, the points, and the dollars.

29.17 † The Linden Street file — \$365,750, 706 representative score, 95.00% LTV, primary residence, single-family detached, purchase, 30-year fixed — but with a 60-day lock instead of 30. Price it at 6.625%.

29.18 Same file, 45-day lock, priced at 6.500%.

29.19 † A \$420,000 conventional 30-year fixed purchase. Representative score 748, LTV 80.00%, primary residence, one-unit detached, 30-day lock. Price it at 6.750%. State whether the borrower pays or receives, and how much.

29.20 A \$310,000 conventional 30-year fixed purchase. Representative score 688, LTV 90.00%, primary residence, one-unit detached, 45-day lock. Price it at 6.625%.

29.21 † Take the file in 29.20 and change one input: the representative score comes back 702 instead of 688. Recompute the final price and the dollars, then state in one sentence what those fourteen points of score were worth to that borrower in cash.

29.22 A file's final price is exactly 100.000. Express what that means in three separate vocabularies: as a price, as points, and as the borrower's cash at closing.

29.23 † Work backward. A \$400,000 loan carries a final price of 99.500 at 6.500%. The base price at 6.500% is 100.250 and the lock is 30 days. What must the file's total loan-level price adjustment have been, excluding the lock?

29.24 Using the Figure 29.2 matrix, name two different score-and-LTV combinations that would each produce an adjustment of 0.625 on a one-unit primary residence purchase. What does the existence of two such combinations tell you about how score and down payment trade against each other?

D. Structure and the rate ladder

29.25 Using the frozen rate/point grid for the Linden Street file, compute the break-even in months for moving down from 6.875% to 6.750%. Show the price given up and the payment saved.

29.26 † A borrower has \$3,000** available for discount points on a **\$400,000 loan. State how many points that is. If the sheet charges 0.500 of price per eighth of rate at their rate, how far down the ladder can they actually get, and what would you tell them about the leftover?

29.27 Using §29.1, explain why the cost of each successive eighth of rate rises as you buy the rate down. Your answer must mention the coupon.

29.28 † A borrower asks for a "no closing cost" loan. Write the two-sentence answer you would actually give on the phone, and name the one number you must have in hand before you can quote it.

29.29 Using §29.7, explain why taking a large lender credit can price a marginal borrower out of the approval they were trying to fund. Use the Linden Street figures.

29.30 † Diagnose this pricing engine run. State every error you can find and what each one would do to the quote.

PRICING ENGINE -- SEARCH RESULTS                 [constructed teaching example]
Run 4:05 p.m. day 12    Sheet effective 8:15 a.m.

  INPUTS AS ENTERED
    Loan amount 365,750    Value 385,000    LTV 95.000   CLTV 95.000
    Rep score 742          Occupancy SECOND HOME
    Property SFD 1-UNIT    Purpose PURCHASE   Term 360
    Lock 15 DAYS           Escrows WAIVED     Sub financing NONE

E. Read the document

29.31 A rate sheet is stamped 8:15 a.m. You are on the phone at 3:40 p.m. quoting from the run you did at 9:42. State what you must do before you put anything in writing, and explain to a borrower in one sentence why the number may have moved.

29.32 † A loan officer's written quote reads: "6.500%, 0.500 discount point, 30-day lock, price 100.125." Is that internally consistent? Explain, and state what the price would have to be for the rest of the line to be true.

29.33 A rate sheet has separate blocks for "Conventional 30-Year Fixed — Conforming" and "Conventional 30-Year Fixed — High Balance." Describe the fact about the loan that determines which block applies, and name the one thing you must confirm before you decide.

29.34 † Your branch manager suggests adding an extra 0.250 to the margin on files "where the borrower obviously isn't shopping." Write the response you would give, and name the two bodies of rule in play.

F. Judgment, ethics, and the Loan File

29.35 A borrower opens the call by saying their friend got 6.250% last month and asks you to match it. Write the sixty-second answer you would actually give — one that neither dismisses the number nor promises it.

29.36 † Loan File extension. Rebuild the Linden Street quote at 6.625% with one input changed: a representative score of 720 rather than 706, everything else identical. State the new final price, the new dollar figure, and the cash difference. Then write two sentences: one naming what those fourteen points were worth, and one describing what you would have done about it on day 1 of the file.

29.37 A real estate partner asks why your rate is a quarter point worse than a competitor's on the same borrower this morning. Using §29.1 and §29.9, write the answer that is both true and useful. It should not accuse the competitor of anything.

29.38 † Write a short internal memo — no more than 200 words — to a new loan officer on your team explaining the difference between the origination charge and the discount point on a Closing Disclosure. Use the Linden Street figures. The memo must survive being read by a borrower.

29.39 A borrower with a 95% LTV file asks whether putting down an extra \$5,000 would improve their pricing. Using the Figure 29.2 grid, work out whether it would, and write the honest answer — including what you would need to check first.

29.40 The chapter claims the 0.500 discount point on the Linden Street file "does not go into anybody's pocket as profit." Explain that claim in your own words, and state what the lender's actual gross revenue on the loan was and where it came from.