Chapter 31 — Exercises

Work these with the chapter open. Items marked † and the odd-numbered items have worked solutions in the answers appendix; the rest are for your own file or your study group. Every constructed figure here is illustrative — advance rates, warehouse pricing, investor bids, and compensation plans are negotiated, confidential, and move constantly. No answers appear in this file.

A. Recall and definition

31.1. In one sentence each, state who funds the loan at the closing table in a retail transaction, a broker transaction, and a correspondent transaction.

31.2. What is a third-party originator (TPO), and which two channels does the term cover?

31.3. An account executive works for whom, and who is the AE's customer?

31.4. Define advance rate and haircut, and say which one is the lender's own money.

31.5. † A warehouse line advances 97.5% on a \$365,750 loan. State (a) the dollars advanced, (b) the dollars the correspondent must supply itself, and (c) the event that returns the correspondent's money to it. Show your arithmetic.

31.6. What does a bailee letter do, and whose interest does it protect?

31.7. State the Regulation X definition of table funding in your own words, and say why a table-funded transaction is treated as an origination rather than a secondary-market transaction.

31.8. Name three things a mortgage brokerage never does that a correspondent always does.

31.9. † A brokerage is approved with nine wholesale lenders. List, from the chapter, six things each of those nine approvals brings with it that the brokerage must track separately. Then write one sentence on what that multiplies into operationally.

31.10. What is dwell time, and why does an operations manager care about it more than a sales manager does?

B. Applied reasoning

31.11. A retail loan officer and a broker each have a file declined on day 28 over a condominium project review. Describe what each one does next, and state which borrower is more likely to close on time and why.

31.12. Your employer is a correspondent. An underwriter tells you a file is "outside the investor's guideline, not ours." Explain, using §31.4, why that sentence is not a bureaucratic excuse.

31.13. † Explain to a real estate agent, in under sixty seconds and without jargon, why a loan that cannot be sold is a catastrophe for a non-bank lender but merely an inconvenience for a large depository. Write it out and time yourself.

31.14. A wholesale lender's turn times go from two days to nine over four weeks. List everything a brokerage can actually do about it, in order of how much it helps.

31.15. Why does a warehouse bank impose a minimum tangible net worth covenant when every advance is already secured by a note? Give the reason in terms of what the collateral is worth if the loans stop being saleable.

31.16. A recruiter tells you "we're a correspondent, so we control our own pricing." Name two things that statement is true about and one thing it is not true about.

31.17. The chapter argues that the broker channel trades control for choice. Construct the strongest possible argument against choosing the broker channel, then the strongest argument for it, in one paragraph each. Do not let either paragraph be a straw man.

31.18. † On the Linden Street file the fifteen-day lock extension cost \$914.38, and the illustrative warehouse carry is \$74.29 per day. Compute the extension's daily cost, compare the two, and explain in three sentences why a lender could pay both on the same loan.

31.19. Your brokerage moves a file from lender A to lender B on day 30 because of an overlay. Name four things that do not transfer with the file, and estimate in days what the move costs.

31.20. Explain why a correspondent that sells servicing-released is choosing cash today over an asset, and name the constraint that usually forces small correspondents into that choice.

C. Run the numbers

31.21. A correspondent funds a \$412,000 loan on a line with a 97% advance rate at 8.00% on a 360-day basis. The investor purchases it 25 days after closing at 100.875. Compute: the advance, the haircut, the daily carry, the total carry, the sale proceeds, and the net gain after repaying the line. [constructed]

31.22. † Using the same facts as 31.21, suppose a post-closing audit exception delays the purchase to 70 days and the loan finally sells at 97.500. Compute the total carry, the sale proceeds, and the correspondent's total economic loss including its haircut. Then state how many loans at 31.21's outcome it takes to recover that loss.

31.23. A \$30,000,000** warehouse line funds loans averaging **\$300,000 at a 98% advance rate. Compute the number of loans outstanding at once, then the annual loan count and dollar volume at a 21-day dwell and at a 35-day dwell. State the difference in dollars. [constructed]

31.24. A brokerage's lender-paid compensation plan with one wholesale lender is 2.000% of loan amount. On a \$298,500 loan, compute the firm's compensation, then the originator's share on a 60/40 split, then the brokerage's share. Verify the two shares foot to the total. [constructed]

31.25. On the Linden Street loan, the origination charge is \$3,657.50 and the discount point charge is \$1,828.75. Express each as a percentage of the \$365,750 loan amount, and state the Section A total.

31.26. A retail lender's comp plan pays 135 basis points of loan amount. Compute the originator's compensation on loans of \$185,000, \$365,750, and \$640,000. Then answer: does paying a fixed percentage of loan amount create an incentive problem the loan originator compensation rule was written to address? Explain what the rule prohibits and what it permits. [constructed]

31.27. † A correspondent has \$4,000,000 of tangible net worth and a covenant limiting it to 12 times leverage on its warehouse facilities. Compute its maximum line capacity. Then compute what happens to that capacity if a quarter of losses reduces net worth to \$3,200,000, and state in one sentence what the company must do about the loans already on the line. [constructed]

31.28. Using the three constructed Section A presentations in Figure 31.1 (\$5,486.25 retail, \$2,923.75 broker lender-paid, \$6,581.25 broker borrower-paid), explain in writing why a borrower cannot rank these three offers from those numbers, and name the single missing fact.

D. Read the document / diagnose the problem

31.29. A Loan Estimate arrives showing a mortgage broker's name in the broker field, a creditor field that is blank, and \$0.00 in origination charges. What can you legitimately conclude, what can you not conclude, and what one question would you ask the borrower who brought it to you?

31.30. A borrower brings you two Closing Disclosures from two lenders. One shows a \$5,240.00 line in "Paid by Others" marked with a lender designation; the other shows nothing comparable. The borrower says the second lender "isn't charging anybody." Write the correction you would give them, in the words you would actually use.

31.31. † A company's marketing describes it as a "direct lender." Its Closing Disclosures name it as creditor. Its files are all underwritten by a single investor with no delegated authority, it draws no documents, it has a warehouse facility provided by that same investor, and it performs no post-closing quality control. List the questions from §31.5 this fact pattern raises, state which side of each question this company falls on, and say what a regulator would likely be examining.

31.32. A broker agreement contains an early payoff provision. Identify what triggers it, what the brokerage owes, and the specific business practice that most reliably triggers it by accident.

E. Write it

31.33. Write a 150-word explanation, addressed to a first-time buyer at application, of why the name on their note may not be the name on your business card. Assume they are anxious and have already been told by a relative that "brokers are more expensive."

31.34. † Which channel would have served this borrower best? Take the Linden Street file — \$385,000 purchase, \$365,750 loan, 95% loan-to-value, 706 representative score, \$10,500.00 monthly income, 42.66% back-end, 4.16 months of reserves, a 45-day contract that took 51 days, an undisclosed \$611.00 debt appearing on day 44, and a lock that was three days short of the contract's closing date the moment it was taken. Write a structured analysis, 600–900 words, that:

1. names the file's three genuine risks, in order;
2. evaluates each channel against those three risks specifically, not in general;
3. states what each channel would have changed about the day-42 extension and the day-44 crisis;
4. names the one fact you would need in order to answer the question with confidence, and says honestly why you do not have it; and
5. reaches a defensible conclusion anyway, with the conditions under which you would reverse it.

Do not conclude that all three are equivalent. Pick one and defend it.

31.35. Write a one-page internal memo to a branch manager recommending whether the branch should seek approval to place files with two wholesale lenders in addition to its retail menu. Address the compliance question, the operational cost, the effect on turn times, and the effect on the loan officers' behavior. Take a position.

31.36. † Write the ten questions you will actually ask at your next interview, drawn from §31.9 but rewritten in your own words for the specific channel you are interviewing in. For each, write in one line what a bad answer would sound like — that is the part that makes the exercise useful.

F. Judgment and ethics

31.37. Your brokerage is approved with two wholesale lenders whose pricing is close. One pays your firm a higher compensation percentage. A file prices four basis points better at the lower-paying lender. Walk through what the loan originator compensation rule requires, what your firm's obligation is, and what you personally do. Then answer the harder question: what would you do if the difference were a single basis point and the higher-paying lender's turn times were three days faster?

31.38. Two related judgment problems.

(a) A recruiter at a depository tells you, "You won't need to bother with the licensing stuff — we just register you, it's much easier." Identify what is accurate in that statement, what is being left out, and what you would ask in response.

(b) A mini-correspondent conversion would increase your firm's revenue on every file and change how its compensation appears on the borrower's Closing Disclosure. Nothing else about the work would change. Is that a legitimate business reason to convert? Argue both sides, then state where you come down and why.

G. NMLS-style exam questions

31.39. Answer both.

(a) An individual takes residential mortgage loan applications for compensation while employed by a federally insured depository institution. Which of the following is required?

A. A state mortgage loan originator license and passage of the SAFE MLO test B. Registration with the NMLS, including a unique identifier and fingerprinting C. Both a state license and registration D. Neither, because depository employees are exempt from the S.A.F.E. Act

(b) A loan officer who has originated for three years at a national bank accepts a position with an independent mortgage company. Before taking an application at the new employer, the originator must:

A. Do nothing; the NMLS unique identifier transfers automatically B. Complete pre-licensing education, pass the SAFE MLO test, and obtain a state license C. Notify the prior employer's compliance department only D. Register with the NMLS, which the originator has already done

31.40. † Answer both.

(a) In a table-funded transaction:

A. The loan is treated as a secondary-market transaction under Regulation X B. The loan closes in one party's name and is funded by a contemporaneous advance from another, with simultaneous assignment to the party advancing the funds C. The borrower funds the loan at the closing table D. The loan may not be sold for at least twelve months

(b) Which of the following revenue sources is available to a correspondent lender but never to a mortgage broker?

A. Compensation paid by the consumer B. Origination charges disclosed in Section A of the Loan Estimate C. Gain on the sale of the closed loan in the secondary market D. Compensation paid by a lender