Chapter 30 — Exercises

Forty items, graduated from recall to judgment. Items marked † receive worked solutions in the answers appendix. No answers appear in this file.

Unless an item says otherwise, use the frozen Linden Street figures: loan \$365,750, 30-year fixed, and this rate/point grid (constructed teaching grid — verify current pricing at the source):

Other frozen figures you will need: taxes \$385.00, homeowners insurance \$130.00, mortgage insurance \$176.78, other monthly debts \$1,446.00, qualifying income \$10,500.00/month.

A. Recall and definition

1. Define a rate lock in one sentence, then list the four specifics a lock must name. For each one, give an example of a change that would require the lock to be re-priced.

2. Name three things a rate lock is not. For each, write the sentence you would say to a borrower who believes otherwise.

3. Define worst-case pricing. Then explain, in two sentences and without using the word "fair," why a lender applies it on a relock.

4. What is a reprice? State who issues it, what triggers it, what it does to a quote given earlier the same morning, and whether it can move in the borrower's favor.

5. Distinguish the federal funds rate from a 30-year fixed mortgage rate: what each one is, who sets it, what consumer products each actually drives, and five categories of information that move the second one.

6. Define fallout and explain, in three sentences, why it costs a lender money even when no loan was ever funded.

7. What is a lock policy? List six things you would expect to find in one, and say where you would go to read your own employer's.

B. Lock sizing

8. † The Linden Street file. The purchase contract names a day-45 closing. The loan officer locks on day 12.

• (a) How many calendar days must fit inside the lock to reach the contract's closing date?
• (b) A 30-day lock taken on day 12 expires on what day?
• (c) By how many days is that lock short of the contract's closing date, before any buffer?
• (d) State, in one sentence, why the answer to (c) is not the fault of anything that happened after day 12.

9. † A purchase contract is executed today naming a closing 38 days from today. You can lock this afternoon. Available lock periods are 15, 30, 45, and 60 days.

• (a) Which period do you take on the bare facts, and what buffer does it give you?
• (b) Now add these facts: the appraisal has not been ordered, the county's title work is running two weeks behind, and the borrower is self-employed. Does your answer change? Show the days you are budgeting and say to whom each one belongs.

10. A borrower asks for a 15-day lock "because it's the cheapest one on your sheet." Their contract closes in 34 days. Write the four sentences you say in reply. Do not use the word "no" in the first sentence.

11. † Reproduce the Linden Street comparison. Assume, for this exercise only, a hypothetical lock-period increment in which a 45-day lock costs 0.125 point more than a 30-day lock.

• (a) What is 0.125 point on \$365,750?
• (b) What was the frozen 15-day extension, in points and in dollars?
• (c) State the ratio between (b) and (a).
• (d) On what day does a 45-day lock taken on day 12 expire? On what day does the frozen extension carry the lock to? What does that comparison prove?

12. A new-construction file has a builder who says the home will be "ready in the spring, probably April." It is currently October. Describe how you would approach the lock, what you would need from the builder before locking anything, and what you would tell the borrower today.

13. † Your file today: appraisal ordered three days ago and not returned, title ordered and not returned, nothing submitted to underwriting, contract closes in 27 days. Work the four inputs from §30.2 and state your recommendation with the reasoning that supports it. You may not use the words "rates are going" anywhere in your answer.

C. Calculation

14. † Using the frozen grid and the frozen escrow, mortgage insurance, and debt figures, compute the Linden Street borrowers' back-end debt-to-income ratio at each of these rates, holding the cost at half a point: 6.500%, 6.625%, 6.750%, 6.875%, 7.000%. Show PITI + MI and total obligations for each. Then compute how many percentage points of back-end ratio one eighth of a point in rate is worth on this file, and estimate how much rate movement would carry the file to 45.00%.

15. † A float-down on a \$298,500 loan costs 0.125 point and requires a 0.250% market improvement to trigger.

• (a) What is the fee in dollars?
• (b) Assume it triggers and saves the borrower \$47.20 a month. How many months to recover the fee?
• (c) Assume it does not trigger. What did the borrower receive for the fee?
• (d) Write the two sentences you would say to this borrower before they buy it.

16. Your lender's hypothetical extension schedule for this exercise charges 0.125 point per 7 days. On a \$447,200 loan, compute the cost of a 21-day extension. Then state why you would not simply take the 21 days when you believe you need 10.

17. † Day 42, the Linden Street file. The desk offers a choice: extend 15 days for 0.250 point, or relock under worst-case pricing. Assume a constructed market movement in which current pricing at half a point buys 6.875%.

• (a) What does the extension cost in dollars?
• (b) What is the monthly payment difference between 6.625% and 6.875%?
• (c) Annual difference? Difference over the full 360 payments?
• (d) How many months does the extension take to pay for itself?
• (e) Now repeat the analysis under a constructed market movement in which current pricing at half a point buys 6.375%. What does worst-case pricing deliver on the relock, and what is the one thing worth asking the desk?
• (f) State the general principle your arithmetic just demonstrated.

18. A market move can appear as a different rate at the same cost, or as the same rate at a different cost. Using the frozen grid, express a "market moved half a point worse" scenario in both forms for the Linden Street file, and state which form a borrower finds easier to understand and why.

D. Read the document and find the problem

19. † Two excerpts from the same file, both dated day 9.

FROM THE PURCHASE CONTRACT
  Closing shall occur on or before ......... the 45th day following execution
  Financing contingency expires ............ the 30th day following execution

FROM THE LOCK CONFIRMATION (requested day 9, confirmed day 9)
  Locked rate .............................. 6.750%
  Price .................................... par
  Lock period .............................. 30 days
  Expiration ............................... day 39

Find every problem. There is more than one. For each, say what it costs and what you would do today.

20. A borrower forwards you a competing lender's float-down term sheet:

  RATE PROTECTION PLUS  [excerpt]
  - One-time float-down available after conditional approval
  - Requires market improvement of at least 0.250% from locked rate
  - Available no later than 10 days prior to note date
  - Borrower receives 50% of the improvement
  - No fee

Answer: what did the borrower actually buy, where is it paid for, and what are the three questions you would tell them to ask that lender before signing anything?

21. You sent this text at 9:04 a.m.:

"6.625% w/ half a point, payment about \$2,342 P&I. Talk it over and let me know."

At 11:00 the borrower replies "let's do it," and the sheet repriced at 10:47. Identify what is missing from your 9:04 message, rewrite it so the same message could not create this problem, and write what you now say at 11:01.

E. Write the document

22. Write the float instruction you would send a borrower who has elected to float, using the four-item structure in §30.2. Fill in real numbers from the frozen grid.

23. † Write the email to a borrower whose 9:00 quote no longer exists after a mid-morning reprice. Requirements: it must lead with the bad news, state the dollar difference, admit the process failure without groveling, and end with a decision the borrower can make today.

24. Write the extension request you would send your lock desk on day 38 of the Linden Street file, four days before expiration. Include everything a desk needs in order to say yes without asking you a single follow-up question.

F. Who pays? Judgment scenarios

For each of items 25 through 30: state who you believe should absorb the cost, name the facts that would have to be documented for the increase to reach the borrower at all, and identify which chapter of this book governs the disclosure question. Then state what you would actually do Monday morning.

25. † The borrower was asked for a current paystub on day 20 and sent it on day 29. The file missed underwriting's queue by a day and the lock expired.

26. The title commitment disclosed a prior owner's mechanic's lien. Clearing it consumed eleven days. The lock expired.

27. † The loan officer took a 30-day lock on day 12 against a contract naming a day-45 closing. The lock expired on day 42.

28. On day 30 the borrowers decided to switch from conventional to FHA to preserve cash. The lock was voided and re-taken; the new lock expired before closing.

29. † The sellers asked to delay closing by nine days for reasons of their own, and the buyers agreed in a signed amendment. The lock expired.

30. Your branch manager tells you to "just take it out of your commission" on item 27. Write what you say, what you check first, and whom you check it with. Name the rule that makes this less simple than it sounds and the chapter that covers it.

G. Judgment and ethics

31. A borrower asks: "Are rates going down? Everyone says the Fed is cutting." Write two responses — one you must never give, and one you would give — and then write two sentences explaining what makes the difference between them a compliance issue rather than a style preference.

32. † On the Linden Street file, the lender absorbed \$914.38 and the borrowers' cash to close never moved from \$25,376.34. They will never see it on a document. Argue both sides of whether you tell them, then state your position and defend it against the strongest objection to it.

33. A borrower you have never met, who has told you plainly they are also working with two other lenders, asks you to lock them today "to hold the rate while I decide." Argue both sides using §30.10, then state what you would do and what you would say.

H. NMLS-style items

34. A rate lock: (a) obligates the borrower to close with the lender · (b) constitutes a loan approval · (c) binds the lender's rate and price for a stated period · (d) may not be extended

35. The Federal Open Market Committee lowers its target for the federal funds rate. The most likely immediate effect on 30-year fixed mortgage rates is: (a) they fall by the same amount · (b) they fall the following business day · (c) there is no direct or automatic effect · (d) they fall by half the amount

36. When mortgage-backed security prices rise, mortgage rates generally: (a) rise · (b) fall · (c) are unaffected · (d) rise for purchases and fall for refinances

37. A lock expires and the borrower requests a relock. Under a worst-case pricing policy, the borrower receives: (a) current market pricing · (b) the original locked pricing · (c) the worse of the two · (d) the better of the two

38. A borrower locked at 6.625% decides to increase their down payment, lowering the loan-to-value ratio. The most accurate statement is: (a) the lock is unaffected because the rate is locked · (b) the lock must be re-worked because a pricing input changed · (c) the lock is automatically voided · (d) the change requires a new application

I. The Loan File

39. † In your Appendix C workbook, complete the Chapter 30 page for the Linden Street file: lock date, rate, price, period, expiration, contract closing date, and margin in days. Then write the lock you would have taken on day 12 and the one-sentence reason. Then build the "what floating would have cost" table across five constructed market paths, from an eighth better to three eighths worse, labeling every path as constructed.

40. Take a live file on your own desk right now. Find the purchase contract's closing date, find the lock expiration, and subtract. Write down the number. If it is not comfortably positive, write what you are going to do about it today — and then do it.