Certified Mortgage Banker (CMB) Exam

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A mortgage company holds a significant portfolio of Mortgage Servicing Rights (MSRs) and has implemented a corresponding hedging strategy. If market interest rates experience a sudden and sharp decline of 100 basis points, what is the most likely combined impact on the MSR portfolio and its hedge?

The MSR value will increase due to higher potential servicing income, and the hedge value will decrease. The MSR value will decrease due to increased prepayment risk, and the hedge value will increase. Both the MSR and hedge values will decrease due to general market volatility. Both the MSR and hedge values will increase as they are designed to be positively correlated.

Correct Answer:

The MSR value will decrease due to increased prepayment risk, and the hedge value will increase.

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