When the contract rate at closing is less than the current market rate (i.e., interest rates have increased since the time of the loan commitment), the mortgage banker will have to sell the newly originated loan at a discount. This scenario best depicts the mortgage banker's exposure to which of the following risks?

Question

Quizplus · Accepted Answer

Interest rate risk refers to the risk that changes in interest rates will affect the value of financial instruments, such as loans. In this scenario, the mortgage banker is exposed to interest rate risk because the increase in rates has caused the value of the newly originated loan to decrease, resulting in the need to sell it at a discount in order to clear the inventory. Fallout risk refers to the risk that a borrower will cancel or withdraw their loan application after pre-approval, default risk refers to the risk that a borrower will default on their loan payments, and liquidity risk refers to the risk of not having enough cash or liquid assets to meet obligations when they become due. While these risks may be present in the mortgage banking industry, they are not the primary risk being depicted in this scenario.

When the Contract Rate at Closing Is Less Than the Current