Deck 9: Mortgage Markets and Mortgagebacked Securities

Question 1

Pass-through mortgage securities have standard denominations but uncertain cash flow.

Answer 1

True

Question 2

CMO residual tranches have the first claim on the cash flow from a pool of mortgages.

Answer 2

False

Question 3

Home equity credit lines are a form of second mortgage financing.

Answer 3

True

Question 4

REMIC securities are a form of collateralized mortgage obligations that provide tax-free income to an investor.

Question 5

Since the financial crisis the Federal National Mortgage Association (FNMA) has been a privately owned corporation with a line of credit from the U.S. Treasury.

Question 6

Investors in CMO securities are not exposed to prepayment risk.

Question 7

Mortgage insurance was an important factor in the development of secondary mortgage markets.

Question 8

An ARM, compared to a FRM, shifts the interest rate risk from the borrower to the lender.

Question 9

Lifetime interest rate caps limit the size of the increase in the loan rate over the loan's life.

Question 10

FHMLC buys only FHA/VA insured mortgages from loan originators.

Question 11

Most mortgage loans are amortized over the maturity of the loan with interest computed on the declining principal.

Question 12

Pass-through securities pass through all principal and interest payments collected from homeowners, providing a fixed stream of cash flow to the investor.

Question 13

Mortgage originators may retain the servicing right and fees even though the mortgage has been sold.

Question 14

Mortgage-backed securities are more liquid than individual mortgages.

Question 15

Unlike mortgage-backed securities, individual mortgages are issued in standard denominations.

Question 16

Like corporate and municipal bonds, mortgages are issued in standard denominations.

Question 17

Mortgage pool securities have encouraged individuals, insurance companies, and pensionfunds to provide indirect mortgage financing.

Question 18

Commercial banks and thrifts are the largest private institutional investor in mortgages.

Question 19

In a conventional mortgage agreement the borrower owns the mortgaged home; the lender takes a lien against the home.

Question 20

A lender with a fixed-rate mortgage bears the risk of future inflation.

Question 21

What is a subprime mortgage? What makes a mortgage 'subprime?' How were these mortgages involved in the 2007-2008 financial crisis?

Question 22

List three ways in which a change in the rate of an adjustable-rate mortgage can affect the borrower's mortgage.

Question 23

Mortgages may now be originated, funded, serviced, and insured by different parties. What developments are associated with this unbundling of loan cash flows in recent years?

Question 24

Explain the ways in which the federal government fostered the development of the secondary mortgage markets.

Question 25

When might an IO mortgage-backed security exhibit a price increase when interest rates increase?

Question 26

Why do mortgage-backed securities guaranteed by Federal government agencies often have yields above U.S. Treasury bond rates?

Question 27

The CPR on a mortgage pool refers to the expected default rate per year on mortgages in the pool.

Question 28

When might an investor prefer an agency backed sequential pay CMO to a standard mortgage pass-through security backed by insured mortgages?

Question 29

A subprime mortgage is a mortgage made to a borrower who has a below normal credit rating.

Question 30

Why is a PO mortgage-backed security more price volatile than a standard non-callable bond?

Question 31

The process of packaging and/or selling mortgages that are then used to back publicly traded debt securities is called securitization.

Question 32

To avoid taxation a pool organizer will structure a CMO as a REMIC.
29 When interest rates fall investors in a mortgage pass-through security will likely receive greater cash flows than expected.

Question 33

The major regulator for the GNMA (Ginnie Mae), FNMA (Fannie Mae), and Federal Home Loan Banks is the Federal Housing Finance Agency.

Question 34

In July 2006, Forrest purchased a town house at $325,000 and paid 25% down. The mortgage that he obtained is a 30-year fixed-rate with an annual percentage interest rate of 5.75%. In July 2011, due to a fall in interest rates, he decided to refinance and obtained a mortgage at a 5.1% annual interest rate for 25 years. After he refinanced, how much is the payment reduced assuming that all payments were made on time?

Question 35

FNMA and FHLMC securitize mortgages but do not provide any final financing of mortgages.

Question 36

Since 2008 the fastest growth in mortgage holdings has been by the federal government.

Question 37

On a fixed rate mortgage the dollars of interest the homeowner pays falls each year the mortgage is outstanding.