Test 4 Study Guide

Question 1

What does it mean to be a “loan servicer”?

Answer 1

• Collects monthly payments, remits to the investor
• Collects and remits payments for property taxes, hazard insurance, and mortgage insurance
• Manages late payments, defaults, and foreclosures
• Receives fee of .25% to .50% of outstanding loan balance
• Typically sell at a discount in order to obtain servicing rights

Question 2

Pipeline Risk for Mortgage Banks

Answer 2

Risk between loan commitment and loan sale

Question 3

Stages of loan origination:

Answer 3

1. Borrower applies for loan
2. Lender issues a loan commitment
3. At some later date the borrower and lender close on the loan (it is at this point that the loan is originated)
4. At another later date the mortgage banker sells the loan to an investor

Question 4

Two components of pipeline risk for mortgage banker:

Answer 4

• Fallout risk: Risk that loan applicant backs out (usually due to a decrease in the interest rate)
• Price risk: Risk that closed loans will fall in value before sold