Chapter 30 — Self-Check Quiz

Twenty-six questions. Multiple choice and short answer, written in the style of the SAFE MLO test where the material is exam-relevant. Work them without looking back at the chapter, then check the key at the bottom.

Frozen figures you may need: loan \$365,750**; 6.625% at +0.500 point = **\$1,828.75, P&I \$2,341.94**; 6.875% P&I **\$2,402.72; 6.750% P&I \$2,372.25**; 6.375% P&I **\$2,281.80; lock taken day 12, 30 days, expiring day 42; contract closing day 45; 15-day extension 0.250 point = \$914.38; actual closing day 51.

1. A rate lock is best described as:

(a) a loan approval conditioned on the rate (b) a lender's binding commitment to a specific rate and price for a specific period (c) a borrower's binding commitment to close with that lender (d) a disclosure required by Regulation Z

2. Which of the following does a rate lock not do?

(a) fix the interest rate for a stated period (b) fix the discount points or lender credit (c) obligate the borrower to close with that lender (d) name the loan amount and property it applies to

3. Longer lock periods generally cost more because:

(a) lenders charge for the additional paperwork (b) a longer option is more valuable, and the lender has written an option (c) longer locks are used only on riskier loans (d) federal rules require a fee for locks over 30 days

4. 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 within 24 hours (b) they fall by roughly half the amount (c) there is no direct or automatic effect (d) they rise by the same amount

5. Mortgage-backed security prices rise sharply during the morning. All else equal, mortgage rates:

(a) rise (b) fall (c) are unaffected until the following day (d) rise for purchase loans only

6. A reprice is:

(a) a lender's mid-day reissue of the rate sheet in response to market movement (b) a re-underwriting of the file after a rate change (c) the borrower's right to re-negotiate a locked rate (d) an adjustment applied at closing to reconcile the note rate to the APR

7. Under a worst-case pricing policy on a relock, the borrower receives:

(a) current market pricing (b) the original locked pricing (c) the worse of the original locked pricing and current market (d) the better of the original locked pricing and current market

8. Short answer. Explain, in two sentences, why worst-case pricing is asymmetric on purpose.

9. A borrower who locked at 6.625% decides to increase their down payment from 5% to 10%. 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 void and a new application is required (d) the lender must honor the original rate at the new loan amount

10. Short answer. The Linden Street lock was taken on day 12 for 30 days against a contract naming a day-45 closing. Show the subtraction that identifies the error, and state the answer in days.

11. A 45-day lock taken on day 12 would expire on which day?

(a) day 45 · (b) day 51 · (c) day 57 · (d) day 60

12. The frozen 15-day extension taken on day 42 carried the lock to which day?

(a) day 51 · (b) day 55 · (c) day 57 · (d) day 60

13. Short answer. What does the coincidence between your answers to 11 and 12 demonstrate about the day-12 lock decision?

14. A float-down is best described as:

(a) a lender's obligation to reduce the rate if the market improves (b) a borrower's right to cancel the lock without penalty (c) an option, inside a lock, permitting the borrower to capture some market improvement under stated conditions (d) an automatic re-pricing that occurs at clear-to-close

15. A lender advertises a float-down with "no fee." The most accurate conclusion is:

(a) the lender is absorbing the cost as a marketing expense (b) the cost is built into the locked rate or price (c) the float-down is unlikely to be honored (d) the lender is violating Regulation Z

16. Short answer. A float-down requires a 0.250% market improvement to trigger, and the market improves by 0.125% before closing. What did the borrower receive for the fee, and why is that not a defect in the product?

17. Calculation. What is 0.250 point on a \$365,750 loan? Show the arithmetic.

18. Calculation. Assume a constructed market movement in which current pricing at half a point buys 6.875% on day 42. What is the monthly payment difference against the locked 6.625%, and how many months does the \$914.38 extension take to pay for itself against that difference?

19. Fallout is best defined as:

(a) the share of applications that are denied by underwriting (b) locked loans that never fund (c) loans that default within the first twelve months (d) the portion of a lender's pipeline sold servicing-released

20. Fallout is most costly to a lender when:

(a) rates have risen, because borrowers cannot afford to close (b) rates have fallen, because the hedge has lost money and the loans walk away (c) rates are unchanged, because there is nothing to offset the loss (d) fallout is equally costly in all markets

21. Short answer. Give two reasons a lender's lock policy might prohibit locking a file before the application is taken.

22. On the Linden Street file, the \$914.38 lock extension was:

(a) added to the borrower's cash to close (b) paid by the seller out of the \$3,000 credit (c) paid by the lender as a tolerance cure, leaving cash to close unchanged (d) waived by the lock desk as a courtesy

23. Short answer. State the borrowers' cash to close on the Linden Street file, and say whether the day-42 extension changed it.

24. Short answer. The borrowers financed \$5,200 of furniture on day 41, which was discovered on day 44 and pushed closing from day 45 to day 51. Explain in two sentences why the furniture is not the cause of the lock extension.

25. A borrower asks whether rates are going down. Which response is professionally defensible?

(a) "Most forecasts say yes, so I'd float." (b) "They're going up — you should lock today." (c) "I can't tell you where rates are going, but I can show you what this costs you in each direction and how much time we have." (d) "That's really up to you."

26. Short answer. You quoted 6.625% at 9:00 a.m. The sheet repriced at 10:47. Your borrower calls at 11:00 to accept. Name the one thing you must not do, and write the first sentence of what you actually say.

Answer Key **1. (b).** A lock binds the lender's rate and price for a stated period on a stated loan. It is not an approval and it does not bind the borrower. **2. (c).** A lock is one-sided. It binds the lender. The borrower may walk away, which is exactly why fallout is a real cost to the lender (§30.10). **3. (b).** The lender has written an option and hedged it. More time is more opportunity for the market to move, so a longer option is worth more — the same logic that makes a longer insurance policy cost more. **4. (c).** The federal funds rate is an overnight bank-to-bank rate. Long-term fixed mortgage rates reflect the yields investors require on long-dated mortgage-backed securities, which move on inflation and growth expectations. A widely expected policy move is usually priced in weeks earlier, and mortgage rates can rise on the afternoon of a cut. **5. (b).** Price up means investors are accepting a lower yield, and mortgage rates fall. Say it both ways until it is automatic: prices up, rates down. **6. (a).** A mid-day reissue of the rate sheet. It can go either direction, and it voids the prior sheet for anything not already locked. **7. (c).** The worse of the two. **8.** Because if expiration handed the borrower current market pricing, every lock would become a one-way bet with unlimited re-runs — let it expire when the market improves, close inside the window when it worsens. The lender wrote and hedged *one* option, so its lock policy removes the upside from expiration. **9. (b).** Loan-to-value is one of the inputs that priced the loan. Improving the file still changes the file, and the lock must be re-worked. Borrowers find this genuinely surprising and should be told before they move money. **10.** $45 - 12 = 33$ days had to fit inside the lock. A 30-day lock covers 30 of them. **The lock was three days short on the day it was taken**, before any buffer at all. **11. (c) day 57.** $12 + 45 = 57$. **12. (c) day 57.** $42 + 15 = 57$. **13.** They are the same date. The extension purchased on day 42, at 0.250 point (\$914.38), precisely the protection that was available on day 12 for a fraction of that — roughly half, using the chapter's illustrative 0.125-point increment. The under-sized lock did not save money; it deferred and doubled the cost, and moved it from a disclosed borrower charge to an unplanned lender expense. **14. (c).** An option inside the lock: one exercise, above a trigger threshold, inside a window, possibly capped or shared. **15. (b).** Options cost money. If there is no fee, the premium is in the locked rate or price. Compare the lender's locked rate with and without the feature and the premium will appear. **16.** Nothing. That is not a defect — it is what an option is. Most float-downs are never exercised, which is precisely why lenders can afford to offer them. The right question is never "will it pay off" but "would I pay this price to remove this risk, knowing that most of the time I get nothing?" **17.** $\$365{,}750 \times 0.00250 = \$914.375$, which rounds to **\$914.38**. **18.** $\$2{,}402.72 - \$2{,}341.94 = \$60.78$ per month. $\$914.38 \div \$60.78 = 15.0$ months. A one-time \$914.38 against \$60.78 a month for 360 payments (\$21,880.80) is not a close decision — which is the ordinary case, because extensions get requested in exactly the markets where relocking hurts. **19. (b).** Locked loans that never fund. **20. (b).** When rates fall, the desk's forward hedge loses money. Ordinarily the locked loans are worth more and offset it — but fallout spikes in exactly that market, because borrowers renegotiate or leave. The hedge loss is realized and the offset walks out the door. **21.** Any two of: a lock on a file that may never become an application is a free option with a low probability of becoming a loan; the desk cannot hedge a position whose size and characteristics are unknown; fallout on unlocked-shopper business is very high; and the loan's pricing inputs (score, loan-to-value, occupancy, property type) are not yet known, so there is nothing to price. **22. (c).** Lender-paid as a tolerance cure. Chapter 22 owns the disclosure mechanics. **23.** **\$25,376.34**, and no — the extension did not change it. That is the whole point of a lender-paid cure. **24.** The lock's expiration date was fixed on day 12, when a 30-day lock was taken against a day-45 contract. Even if the borrowers had bought nothing and the file had closed exactly on day 45, the lock still expires on day 42 and an extension is still required. The furniture cost days at the end of the file; it did not cost the lock. **25. (c).** (a) and (b) are forecasts a licensed professional is not in a position to make and will own when they are wrong. (d) is technically compliant and useless — the borrower called because they cannot evaluate this, and handing the decision back without a framework is abandonment. **26.** You must not tell the borrower you already locked them, or quietly lock at the new number and hope they do not compare it to your 9:04 message. First sentence, in substance: *"I have to give you bad news before you hear it somewhere else — pricing changed at 10:47 this morning and the rate I quoted you at nine o'clock isn't on the sheet anymore."* Then the current number, the dollar difference, the apology for quoting without an expiration attached, and the decision available today.