Certified Mortgage Banker (CMB) Exam

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A depository institution holds a large portfolio of 30-year fixed-rate mortgages as assets, while its primary liabilities are short-term customer deposits. If the central bank signals a sustained period of rising interest rates, what is the primary asset-liability management (ALM) risk the institution faces?

Prepayment risk, as borrowers will rush to pay off their low-rate mortgages. Credit risk, as borrowers will be more likely to default in a high-rate environment. Net interest margin (NIM) compression due to a duration mismatch. Operational risk from handling an increased volume of customer inquiries.

Correct Answer:

Net interest margin (NIM) compression due to a duration mismatch.

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