Chapter 40 — Exercises

This is the last exercise set in the book, and it is different in kind from the thirty-nine before it. Most of these problems have no guideline to look up. They ask you to build a model, defend a decision, and — in Section E — to do the thing the whole book has been preparing you for: take a number somebody advertised and find out whether it is real for the borrower in front of you.

Work them with a financial calculator or a spreadsheet. Where a problem supplies a compensation rate, a conversion rate, a salary, an expense factor, or a pricing grid, treat it as given for that problem only. None of those values is standard, none is published, and quoting one to a real borrower or a real recruit is how loan officers embarrass themselves.

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

A. Recall and definitions

40.1 Define units and volume precisely. Then construct a single example in which two originators have the same volume and different units, and state one compensation structure under which each of them out-earns the other.

40.2 §40.3 says the first hire is almost always a loan partner rather than a junior originator. State the three reasons a junior-first hire usually fails, and identify which of the three is the one the hiring originator least expects.

40.3 Distinguish a branch manager from a sales manager by what each one owns. Then state what changes about the incentive when compensation moves from personal production to override.

40.4 §40.8 says that originators who leave after a boom did not get worse — "their business was a market condition they mistook for a skill." Restate that claim without the metaphor, and name the five things the chapter says actually protect a business.

40.5 §40.1 gives four questions to ask a hiring manager. State them, and for each one name the specific thing it is designed to detect. Then write a fifth question of your own and say what it detects.

40.6 Build a six-row comparison of residential and commercial mortgage origination. Then state which single difference most changes the loan officer's daily work, as opposed to their underwriting, and defend the choice.

40.7 Multi-state licensing. State (a) what is portable across states and what is not, (b) three good reasons to add a state, (c) one bad reason, and (d) the recurring annual cost a second license creates even in a year when you close nothing in that state.

B. The production model

40.8 Write the production identity from §40.2. For each of the three factors, state whether it is mostly within your control, mostly outside it, or genuinely negotiable — and say what that implies about which one you should work on first.

40.9 † A loan officer wants \$95,000** of income at **90 basis points** on a **\$268,000 average loan.

(a) Compute the commission per file. (b) Compute the units required. (c) Express that as closings per month. (d) At Chapter 7's illustrative 6.4% funnel conversion, compute the conversations required. (e) Express that per week. (f) Now recompute (a) through (e) for a \$185,000 average loan at the same income and the same basis points, and state the difference in units and in weekly conversations.

40.10 Using your answer to 40.9(f), write the three sentences you would say to an originator who tells you their friend in another state closes forty-eight loans a year and they only close thirty.

40.11 Compute the units required for \$180,000 of income at 100 basis points on a \$425,000 average loan, then the weekly conversations that implies at a 6.4% conversion. State one structural reason a \$425,000-average market is harder to break into than the arithmetic suggests.

40.12 † Two compensation plans, same market, same originator. [constructed teaching example]

Assume a \$300,000 average loan.

(a) Compute the originator's net income under each plan at 30 units a year. (b) Compute the number of units at which the two plans pay the same. (c) State which plan a new originator should take and which an established one should take, and why they are different answers. (d) Name one non-arithmetic factor that could reverse your answer to (c).

40.13 A plan pays 150 basis points, but the originator buys leads at \$95 each and closes 9% of them. On a \$300,000 average loan, compute the effective basis points after lead cost. Then state which plan in 40.12 this most resembles, and what question you would ask before comparing it to either.

40.14 §40.2 says forty-one closings requires about 641 conversations, or twelve a week. Take your own market, your own database (or the size you intend it to reach), and your own agent relationships, and write down — with a number and a source for each — where your twelve conversations a week are going to come from. Where the arithmetic does not close, say so plainly and state what you will do about the gap.

C. The first hire, the team, and the branch

40.15 §40.3 says the signal to hire is not "I am busy." State the actual signal in one sentence, then state the diagnostic from Chapter 39 that tells you whether you have reached it.

40.16 † The first-hire arithmetic. [constructed teaching example] A loan partner is offered \$52,000 in salary. Payroll taxes, benefits, and equipment add 12%. The originator earns 105 basis points on a \$310,000 average loan.

(a) Compute the fully loaded annual and monthly cost of the hire. (b) Compute the additional closings per month required to break even. (c) Compute the additional closings per year. (d) If the hire returns fifteen hours a week over forty-eight weeks, compute the hours of returned time that must produce one additional closing. (e) State the one condition under which this hire fails despite the arithmetic working.

40.17 Rank the four hires in §40.3's table in the order the chapter recommends. For each step, name the resource the previous hire did not require — lead surplus, supervision capacity, training capability, or budget — and say which of those an originator most often overestimates in themselves.

40.18 An originator closing eighteen loans a month asks whether to build a team. Write the two questions you ask before answering. State which one matters more, and why the answer to it is not a business question at all.

40.19 Two originators of similar production want to share operations and cost. List six things that must be in writing before the first shared file, and name the one that is most often left out — and what it costs when it is.

40.20 A branch carries \$96,000 a month of fixed cost — occupancy, technology, operations salaries, compliance, and overhead — and retains 95 basis points of volume after originator compensation. The average loan is \$305,000. [constructed teaching example]

(a) Compute the branch's contribution per closed unit. (b) Compute monthly and annual break-even units. (c) The branch closes 41 units in a strong month and 22 in a weak one. Compute the profit or loss in each. (d) State, in one sentence, what §40.5 means by "a branch's economics are not the sum of its originators' economics."

D. Surviving a rate cycle

40.21 Name the five protections in §40.8. For each one, state why it cannot be built during a contraction — and be specific: the reason is different for each of the five.

40.22 † A survivability analysis. [constructed teaching example] An origination business closes 40 units a year at a \$340,000 average loan, 60% refinance, earning 105 basis points. Fixed costs — an assistant, a processor's share, software, marketing, and occupancy — run \$9,200 a month.

(a) Compute annual revenue, annual fixed cost, and net. (b) Rates rise. Refinance volume falls to 15% of its prior level; purchase volume holds. Compute the new unit count, revenue, and net. (c) Compute the monthly reduction in fixed cost required to reach break-even, and express it as a percentage. (d) Compute the purchase share the business would have needed at the peak to survive the same contraction without cutting anything. (e) State in one sentence what that purchase share actually depends on, and which chapter builds it.

40.23 §40.8 ends with a question: what am I assuming that I have not written down? Write three assumptions currently embedded in your own business or your plan for one. For each, state the evidence that would falsify it and the earliest date you could observe that evidence.

40.24 §40.8 puts three failures side by side: the 1920s mortgage that assumed refinancing would always be available, the 1970s thrift that assumed short rates would stay below long rates, and the 2021 origination business that assumed volume would hold. State the shared structure in one sentence. Then find a fourth example somewhere else in this book and show that it has the same shape.

40.25 A branch manager wants to sign a seven-year lease on a larger office in the middle of a boom. Write the three questions the P&L must answer before that signature, and state the volume level at which the lease still has to work. Then say what you would do instead if the answer to any of the three is unknown.

E. The capstone: reprice the advertised rate

40.26 † The capstone exercise. A borrower brings you an advertisement. Do the whole job.

[constructed teaching example — every figure below is constructed for this exercise]

THE FILE
  Purchase price                                              $500,000.00
  Down payment  20%                                           $100,000.00
  Loan amount                                                 $400,000.00
  LTV                                                              80.00%
  Representative score                                                688
  Mortgage insurance                                    none (LTV = 80%)
  Taxes  $6,000/yr                                                $500.00 /mo
  Homeowners insurance  $1,680/yr                                 $140.00 /mo
  HOA                                                               $0.00
  Gross monthly income                                         $13,200.00
  Other monthly debts                                           $1,180.00
  Verified assets remaining (earnest money already paid)      $132,000.00
  Earnest money already delivered, credited at closing          $8,000.00
  Closing costs and prepaids, EXCLUDING any discount points    $11,450.00
  Seller credit                                                     $0.00

WHAT YOU QUOTED                6.625%, PAR, zero points

WHAT THEY BRING YOU            6.250%, "no points," from an online lender.
                               The advertisement's fine print prices it for a
                               780 score at 60% loan-to-value.

YOUR OWN RATE SHEET, THIS FILE, THIS DAY, 30-DAY LOCK
  6.750%  ......  (0.250) credit
  6.625%  ......  par
  6.500%  ......  +0.375
  6.375%  ......  +0.875
  6.250%  ......  +1.250

(a) Compute the principal and interest at 6.625% and at 6.250%, and the monthly difference. (b) Compute the cost in dollars of the 6.250% row for this file. (c) Compute the break-even in months and in years. (d) Compute cash to close and reserves in months under both structures. (e) State whether the advertised rate is better for this borrower, and give the two independent tests your answer has to pass. (f) Now change one fact: verified assets remaining are \$110,000.00**, not \$132,000.00. Recompute reserves under both structures and state whether your answer to (e) changes — and, precisely, which of the two tests changed. (g) Write the four sentences you would actually say on the phone.

40.27 Reproduce Figure 40.1 from scratch, without looking at it. You need only Chapter 29's score/LTV grid, Chapter 4's rate sheet, and the loan amount. Show every step: the cell, the points, the dollars at each rate, the difference, and the reason the difference equals the loan-level price adjustment rather than merely resembling it.

40.28 Explain to a first-time buyer, in ninety seconds of speech or less, why the rate they saw advertised is not available to them — without using the words "adjustment," "grid," "matrix," "LLPA," or "pricing engine." Write it out. Then read it aloud and time it.

40.29 Chapter 13's ladder priced 6.375% at 1.625 points and reported a break-even of 65.7 months. §40.11 reports 68.4 months for the same rate on the same file. Both are correct.

(a) Show the arithmetic behind each. (b) Name the baseline each uses. (c) State which one answers the question the borrower is actually asking in Chapter 40, and why. (d) State the general rule this gives you about quoting a break-even to anybody.

F. Judgment: defend or overturn

40.30 † The three loan-officer decisions. §40.10 marks three as wrong. Take each one separately and do four things: (i) state the decision as the loan officer would have defended it at the time, (ii) state the alternative available on that day, (iii) state the cost in dollars, days, or risk, and (iv) return a verdict — defend or overturn — with a reason that would survive a branch manager reading it.

Then rank the three by likelihood of recurrence in your own practice and say what you will actually change about your process for the top-ranked one.

40.31 §40.10 marks four decisions right. Choose the one you find least secure — the pre-approval on day 1, conventional over FHA, the half point at 6.625%, or ordering appraisal and title on day 7 — and argue the other side as strongly as you can. Then say what fact, if it had been different, would have flipped the verdict.

40.32 The chapter states flatly that "the borrowers did nothing wrong." Argue the contrary position as strongly as you can, using only facts in the file. Then state why the chapter's position is still the correct one for a loan officer to hold, and what would change if it were not.

40.33 The lock was three days short the moment it was taken. Write the two-sentence rule that prevents this. State the buffer in days you would use, name the two things that consume a buffer on an ordinary file, and say what you do when the borrower asks why you are quoting a longer lock than the competitor.

40.34 † The eleven dead days. Using the calendar in §40.10 and Chapter 22's three-business-day requirement:

(a) State the day documentation was complete and the day of the next event on the file. (b) Compute the days of slack that existed against the lock's expiration. (c) Assume clear-to-close had been obtained on day 34 and the Closing Disclosure delivered and received on day 35, a Wednesday. Compute the earliest lawful closing date. (d) State what that closing date would have saved, in dollars and in days — and name the third thing it would have prevented entirely. (e) Name the Chapter 39 artifact that would have surfaced the dead window on day 34 rather than on day 44.

G. NMLS-style exam questions

40.35 A loan originator holds an active state license in State A and wants to originate loans on properties in State B. Which statement is generally correct?

A. The national component of the SAFE MLO test must be retaken for State B B. The national test component with uniform state content is portable; State B's application, fees, surety bond, and any state-specific education requirements still apply C. A federal registration held in State A satisfies State B's requirement D. No additional license is required if the borrower resides in State A

40.36 A borrower resides in State A. The property securing the loan is in State B. The loan officer's desk is in State C. Which licensing statement is most accurate?

A. State C only, because that is where the origination activity occurs B. State A only, because that is where the consumer is C. Generally the state where the property is located, and possibly the borrower's state as well, because some states regulate based on where the borrower is when solicited D. All three states, in every case

40.37 Regarding state MLO license renewal:

A. Renewals are biennial and the window closes June 30 B. Renewals are annual, the window closes December 31, and each additional state carries its own continuing education requirements C. Renewal is automatic once continuing education is complete D. Continuing education completed in any prior year may be applied to the current renewal

40.38 In one month, Originator 1 closes 4 loans totaling \$3,200,000. Originator 2 closes 12 loans totaling \$2,160,000. Which statement is correct?

A. Originator 2 produced more volume B. Originator 1 produced more volume and fewer units; which one earned more depends on the compensation plan C. Units and volume move together, so the comparison is unnecessary D. Only volume is used to measure production

H. Your first year

40.39 Write your own first-year plan against §40.12. Use its four periods and its all-year disciplines, but put your numbers in it: your market's average loan size, the compensation you have actually been offered or hold, your living costs, and the four agent relationships you intend to build — named, if you can name them.

Then, as §40.12's Loan File task requires, put one sentence at the top naming the discipline you are least likely to keep. Be specific. "I will be disciplined" is not a sentence; "I will stop measuring locks against the closing date once I am busy" is.

40.40 † The reserve requirement, computed for you rather than for the illustration.

Rebuild §40.1's cash-position table using (a) your actual monthly living cost, (b) the average loan size in the market you will work, (c) the basis points you have actually been offered, and (d) an honest ramp — how many closings you believe you will have in months 1–2, 3–4, 5–6, and 7–12, with a one-line justification for each.

Compute the month at which your cumulative cash position bottoms, the size of that hole, and the months of reserves it implies. Then answer the only question that matters: do you have it, or do you need a draw? If a draw, write down what happens if you leave owing it.