Question

Suppose that a mortgage bank locked in an interest rate for a prospective borrower at 8.5%. However, prior to the loan closing, the market mortgage rate falls to 7.5%. In this scenario, the mortgage banker would be most concerned with which of the following risks?

a. fallout riskb. prepayment riskc. liquidity riskd. default risk

Answer 1

Option “A” Fallout risk is the correct answer.

Step-by-step explanation:

Option “A” Fallout risk is correct because it refers to the probability of borrowers to fail to complete the loan transaction. If the interest rate rises then the borrower will accept the term and condition. However, if the interest rate falls during lock-in a period then there are more chances that the borrower will find the cheaper source and thus, the lower number of the loan will close as a result.