Chapter 29 — Self-Check Quiz

Twenty-five questions. The multiple-choice items are written in the style of the SAFE MLO test where the material is exam-relevant. Work them before opening the key.

All pricing figures come from the chapter's constructed grids and are illustrative only.

Multiple choice

1. A rate sheet price of exactly 100.000 is known as: a) the base rate b) par c) the yield spread d) the buy-down

2. A loan prices at 99.250 on a \$300,000 loan amount. The borrower: a) receives a credit of \$2,250.00 b) pays \$2,250.00 c) pays \$750.00 d) neither pays nor receives

3. A final price above 100.000 generates: a) discount points payable by the borrower b) a rebate that may fund a lender credit c) an origination charge d) a guarantee fee

4. Loan-level price adjustments are expressed in: a) basis points of interest rate b) dollars per thousand of loan amount c) points of price d) months of break-even

5. Two borrowers apply together. Borrower 1's scores are 742 / 738 / 751; Borrower 2's are 706 / 712 / 698. The representative score used to price a conventional loan is: a) 751 b) 742 c) 720 d) 706

6. Which of the following is generally found on a separate adjustment table rather than inside the credit score / LTV matrix? a) loan-to-value b) representative credit score c) occupancy d) neither score nor LTV

7. A 6.625% note rate, less a 0.250% servicing fee and a 0.375% guarantee fee, delivers into a pass-through coupon of: a) 5.500% b) 6.000% c) 6.250% d) 6.625%

8. Lock period adjustments exist principally because: a) longer locks require additional disclosures b) the lender must carry a hedge longer and faces more chance the loan never funds c) the agencies charge more for longer locks d) borrowers who lock longer have lower credit scores

9. All else equal, moving a quote from a 15-day lock to a 60-day lock will: a) improve the price b) worsen the price c) have no effect d) change the note rate

10. Under the Loan Originator Compensation rule, an originator's compensation: a) may increase with the note rate b) may increase with the loan amount only if disclosed c) may not be based on the terms of the transaction d) must be paid entirely by the borrower

11. A "no closing cost" loan is typically funded by: a) the lender absorbing the costs out of profit b) premium pricing — a rate high enough to generate a rebate c) a seller concession d) waiving the appraisal

12. A lender credit generated by premium pricing: a) may be paid to the borrower as cash at closing b) may not exceed the borrower's actual closing costs c) is unlimited d) must be split with the real estate agent

13. On a rate sheet quoted in decimals, a TBA price quoted as "101-16" equals: a) 101.16 b) 101.160 c) 101.500 d) 101.625

14. A lender hedges its locked pipeline most commonly by: a) buying mortgage-backed securities b) selling TBA securities forward c) purchasing mortgage insurance d) raising the origination fee

15. A pricing engine returns "ineligible" for a product. The most accurate reading is: a) the borrower has been denied b) the automated underwriting system declined the file c) the loan does not meet that product's parameters as the file was entered d) the rate sheet has expired

16. Which of the following is not an input to a loan's price? a) occupancy b) property type c) the borrower's employer d) lock period

17. A borrower's representative score falls from 720 to 719. On a typical published matrix this: a) has no effect, because the change is one point b) can move the file into a different pricing row and change the adjustment materially c) changes the note rate directly d) affects eligibility but never price

18. On the Linden Street file, the par rate — the rate whose final price is exactly 100.000 — is: a) 6.375% b) 6.625% c) 6.750% d) 7.000%

19. A base price of 100.750, an LLPA total of 1.125, and a lock adjustment of 0.125 produce a final price of: a) 99.500 b) 99.625 c) 101.000 d) 98.375

20. On a \$420,000 loan, a final price of 100.875 means the borrower: a) pays \$3,675.00 b) receives \$3,675.00 c) pays \$875.00 d) receives \$875.00

Short answer

21. State the two formulas that convert a rate sheet price into a dollar figure, and say what a negative points figure means.

22. Define pull-through, and explain in two sentences why it moves against a lender's hedge in both directions.

23. Why is the highest loan-to-value column on a credit score / LTV matrix sometimes cheaper than the column just below it? Give the reason, not just the observation.

24. Four numbers go into a base price: the security price, the servicing strip, the lender's margin, and the hedge reserve. A borrower asks why a competitor's rate is better than yours this morning. Which of the four is the likely explanation, and why are the other three usually similar across lenders?

25. The chapter says the 0.500 discount point on the Linden Street file "does not go into anybody's pocket as profit." Explain what the \$1,828.75 is actually doing.

Answer key **1. (b) par.** 100.000 is the pivot: the loan is worth exactly the loan amount, so no discount point is paid and no rebate is generated. **2. (b) pays \$2,250.00.** Points = 100.000 − 99.250 = 0.750. Dollars = 0.750% × \$300,000 = \$2,250.00. Below par means the borrower pays. **3. (b) a rebate that may fund a lender credit.** Above par, the lender receives more than the loan amount when it sells and can pass the surplus to the borrower's costs. **4. (c) points of price.** The matrix never says "add to the rate." What the adjustment becomes for the borrower — cash, or a higher rate — depends on where on the ladder they sit. **5. (d) 706.** Each borrower's middle score is taken first (742 and 706); for a conventional loan with two borrowers, the representative score is the **lower** of those middles. **6. (c) occupancy.** Occupancy, property type, purpose, product, and subordinate financing sit on separate adjuster tables that **stack** on top of the score/LTV grid. **7. (b) 6.000%.** 6.625 − 0.250 − 0.375 = 6.000, which delivers into the 6.0% TBA coupon. **8. (b) carry and fallout.** A longer lock means a later settlement month and a longer hedge, and it means more chance the loan never closes at all. **9. (b) worsen the price.** On the chapter's constructed table, 15 days is the base and 60 days costs 0.375 of price — \$1,371.56 on the Linden Street loan amount. **10. (c) may not be based on the terms of the transaction.** This is the rule that ended the old yield spread premium arrangement in the form it previously took. Chapter 26 covers it in full. **11. (b) premium pricing.** The rate is set high enough that the final price exceeds 100.000, and the rebate is applied to the borrower's costs. The borrower pays for it in the payment, for thirty years. **12. (b) may not exceed the borrower's actual closing costs.** Credits offset costs; they are not cash back. Excess has to be resolved another way, typically by lowering the rate. **13. (c) 101.500.** TBA prices are quoted in thirty-seconds; 16/32 = 0.500. **14. (b) selling TBA securities forward.** The short position gains when rates rise, offsetting the loss in value on a pipeline of loans the lender has promised at yesterday's rate. **15. (c) the loan does not meet that product's parameters as the file was entered.** It is not an underwriting decision, and "as entered" is doing real work in that sentence — check the inputs first. **16. (c) the borrower's employer.** Income and employment drive *eligibility* and the ratios, not price. (a), (b), and (d) are all priced. **17. (b) it can move the file into a different pricing row.** The bands are cliffs, not slopes. This is the economic argument for pulling credit before you quote. **18. (c) 6.750%.** Base 101.250 − 1.250 of adjustments = 100.000 exactly. **19. (a) 99.500.** 100.750 − 1.125 − 0.125 = 99.500. That is the Linden Street build. **20. (b) receives \$3,675.00.** Points = 100.000 − 100.875 = −0.875, a rebate. 0.875% × \$420,000 = \$3,675.00. **21.** points = 100.000 − price; dollars = points × loan amount ÷ 100. A **negative** points figure is a rebate — money moving from the lender toward the borrower's costs, not from the borrower. **22.** Pull-through is the share of locked loans that actually fund. When rates improve the pipeline gains value but borrowers renegotiate or leave, so pull-through falls and the desk is **over**-hedged; when rates worsen borrowers cling to their locks, pull-through rises, and the desk is **under**-hedged. Either way the error runs the wrong way. **23.** Loans above 95% LTV carry deeper mortgage insurance coverage, and the pricing recognizes that the insurer is absorbing more of the loss. It is not a typo and it is not a loophole — check whether you have crossed that boundary before telling a borrower that more money down made their pricing worse. **24.** The **lender's margin**. The security price is a public market, the servicing strip is worth roughly the same to any competent buyer, and guarantee fees vary but not wildly. Margin is a management decision about appetite for volume this week — which is why the answer to "why is their rate better" is usually "they want more loans today than we do," not "they have cheaper money." **25.** It raises a final price of 99.500 up to par. The lender is exactly as whole at 6.625%-with-a-half-point as it would have been at 6.750%-at-par; the borrower is buying the loan back to 100.000. The lender's actual gross revenue on the file came from the margin embedded in the base price (1.375 points, \$5,029.06) plus the origination charge (1.000 point, \$3,657.50) — \$8,686.56 in total, out of which comes the loan officer's commission, operations, technology, compliance, and the hedge result.