Deck 18: Mortgage Market

Question 1

After World War II, and through the 1970s, what was true of home ownership rates?

A)Home ownership rates increased briefly and then remained steady at about 55%.
B)Home ownership rates increased and then began to fall again in the late 1960s.
C)Home ownership rates increased steadily, in part due to an increase in wages combined with low interest rates.
D)Home ownership rates increased for about ten years and then fell to pre-WWII levels.

Answer 1

C

Question 2

Donna is in the business of buying houses, fixing them up, and then reselling them quickly (flipping). Donna might be interested in a

A)zero-down home mortgage.
B)teaser-rate ARM.
C)conventional mortgage.
D)no documentation home mortgage.

Answer 2

B

Question 3

A big advantage to the borrower of a 15-year mortgage loan compared to a 30-year mortgage loan is that

A)the monthly payments will be less over the life of the loan.
B)far less interest will be paid over the life of the loan.
C)it may be obtained with a smaller down payment.
D)the borrower will be eligible for an ARM.

Answer 3

B

Question 4

John is a nonveteran borrower with a fairly good credit rating, a good work history, and a solid job with a steady stream of income. John may qualify for an insured mortgage from the

A)Treasury.
B)Veteran's Administration (VA).
C)Federal Housing Administration (FHA).
D)Federal Home Loan Bank System (FHLB).

Question 5

Today, the typical amount of cash needed for a down payment for a conventional home mortgage is what percentage of the purchase price?

A)10%
B)15%
C)20%
D)25%

Question 6

Which of these statements accurately describes home ownership in the United States prior to World War II?

A)A typical down payment on a house was 25% or more, and home ownership rates were a little less than 20%.
B)A typical down payment on a house was about 35%, and home ownership rates were about 30%.
C)A typical down payment on a house was 50% or more, and home ownership rates were a little less than 50%.
D)A typical down payment on a house was 75%, and home ownership rates were about 40%.

Question 7

Which of these is the best description of a no documentation home mortgage?

A)A loan made without verifying a borrower's character references or credit rating
B)A loan made without documentation of a borrower's citizenship status or employment
C)A loan made without documentation of a borrower's employment
D)A loan made without verifying the income or assets of the borrower

Question 8

Tori has a home mortgage where the lender is providing 100% of the purchase price of the house. What is this type of loan called, and what is the risk from the perspective of the bank?

A)This is a zero-down mortgage, and it has a significantly higher risk of default.
B)This is a zero-down mortgage, and it will take longer to recoup the investment.
C)This is a negative amortization mortgage, and there is no significant risk to the bank.
D)This is a no documentation mortgage, and it has a significantly higher risk of default.

Question 9

A major challenge for banks with lots of mortgage loans is a lack of liquidity. The solution to this problem has been the emergence of

A)liquid mortgages.
B)a secondary mortgage market.
C)a primary mortgage market.
D)mortgage insurance.

Question 10

The housing industry today is a significant part of the US economy. Between housing services and residential investment spending, the housing sector accounts for what percentage of the US GDP?

A)About 6%
B)About 9%
C)About 10% to 13%
D)About 15% to 18%

Question 11

The federal agency created during the Great Depression to establish a secondary mortgage market by purchasing FHA-insured loans at par and accrued interest was the

A)Federal Home Loan Bank (FHLB)System.
B)Home Owners' Loan Corporation (HOLC).
C)Federal Housing Administration (FHA).
D)Federal National Mortgage Association (FNMA).

Question 12

The initial solution to the challenges in the development of a secondary mortgage market was to

A)pass regulation to standardize mortgages.
B)provide guarantees on mortgages through the Government National Mortgage Association (Ginnie Mae).
C)create the Federal National Mortgage Association (Fannie Mae)to buy FHA mortgages.
D)encourage smaller investors to buy into mortgage pools.

Question 13

In addition to the need for a hefty down payment, buying a home prior to WWII was challenging because

A)there were an insufficient number of homes available.
B)instead of 15 - 30 years to repay the loan, borrowers had only five years.
C)mortgage interest rates were very high.
D)banks had insufficient reserves to make mortgage loans.

Question 14

What inherent difficulty was solved with the Gaussian copula model and how did the model solve this problem?

A)Pricing collateralized debt obligations (CDOs)and collateralized mortgage obligations (CMOs)involves prepayment and default risk; the model simplified these risks by attaching standardized default risks for various mortgage types.
B)Pricing CDOs involves a great deal of prepayment risk; the model standardized prepayment risks for various types of CDOs.
C)Pricing collateralized debt obligations (CDOs)and collateralized mortgage obligations (CMOs)involves prepayment risk, as well as default risk and interest rate risk; the model provided a simple way to measure correlation for these risks.
D)Pricing CDOs and CMOs involves a great deal of default risk; the model more accurately calculated appropriate default risks.

Question 15

A loan with real estate used as collateral and where the terms of the contract allow the lender to change the interest rate is known as a(n)

A)fixed-rate mortgage.
B)ARM.
C)LIBOR.
D)balloon mortgage.

Question 16

The disadvantage to the borrower of an adjustable-rate mortgage is that

A)a much larger down payment is usually required.
B)the borrower is only partly in control of how much the monthly payments might change.
C)the borrower is expected to pay discount points at the closing.
D)interest rates and monthly payments can rise, sometimes by a great deal.

Question 17

Jamal has a mortgage with an extremely low initial interest rate that will increase dramatically in a few years. Jamal's mortgage is a

A)zero-down home mortgage.
B)teaser-rate ARM.
C)negative amortization home mortgage.
D)no documentation home mortgage.

Question 18

Lucy has a mortgage where the initial monthly payments are less than the monthly interest charges so that the mortgage balance will increase over the first few years. Lucy's mortgage is a

A)zero-down home mortgage.
B)teaser-rate ARM.
C)negative amortization home mortgage.
D)no documentation home mortgage.

Question 19

Which of the following was NOT a problem that had to be overcome to develop a secondary mortgage market?

A)Mortgages are typically too small to be of interest to institutional investors.
B)Mortgages were not standardized.
C)Mortgage interest rates were too low.
D)Mortgages are difficult for an institutional investor to analyze.

Question 20

Often as part of a mortgage payment, banks will allow borrowers to "escrow" funds to pay for

A)homeowners' insurance and property taxes.
B)home maintenance and homeowners' insurance.
C)electricity and heating expenses.
D)home repairs and property taxes.

Question 21

In acting to help create a secondary mortgage market, Fannie Mae solved the "difficult to evaluate" problem by

A)pooling mortgages together and creating a new financial instrument called a mortgage pass-through.
B)functioning as the loan servicer, collecting the payments from various mortgages and creating a nice, even, steady stream of payments to the institutional investors.
C)requiring loan originators to make sure only FHA, VA, or other government-qualified mortgages were included in mortgage pools.
D)creating Ginnie Mae and Freddie Mac to service bundled loans for institutional investors.

Question 22

On a home with a $250,000 purchase price, a typical 20% down payment would be $50,000.

Question 23

In acting to help create a secondary mortgage market, how was the size problem initially solved-the problem that mortgages are usually too small to be of interest to institutional investors?

A)By pooling mortgages together, Fannie Mae created a new financial instrument called a mortgage pass-through.
B)By functioning as the loan servicer, Ginnie Mae collected the payments from various mortgages and created a nice, even, steady stream of payments to the institutional investors.
C)By requiring loan originators to make sure only FHA, VA, or other government-qualified mortgages were included in mortgage pools, Freddie Mac attracted institutional investors.
D)Ginnie Mae and Freddie Mac were created to service bundled loans for institutional investors.

Question 24

The main function, collectively, of the Federal National Mortgage Association (Fannie Mae), the Government National Mortgage Association (Ginnie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac)was to do what?

A)To buy and pool government-qualified and subprime mortgages to sell to investors
B)To buy and pool government-qualified and government-backed mortgages to sell to investors
C)To buy and pool both government-qualified and conventional mortgages to sell to investors
D)To guarantee that all pooled mortgages were backed by the US government

Question 25

Problems that the early mortgage-backed assets faced were __________ risk and __________ risk, which limited the amount of interest paid.

A)interest rate; liquidity
B)curtailment; prepayment
C)liquidity; curtailment
D)interest rate; prepayment

Question 26

From the perspective of the borrower, what are the risks and rewards associated with an adjustable-rate mortgage?

Question 27

In acting to help create a secondary mortgage market, Fannie Mae solved the  standardization problem by

A)pooling mortgages together and creating a new financial instrument called a mortgage pass-through.
B)functioning as the loan servicer, collecting the payments from various mortgages and creating a nice, even, steady stream of payments to the institutional investors.
C)requiring loan originators to make sure only FHA, VA, or other government-qualified mortgages were included in mortgage pools.
D)creating Ginnie Mae and Freddie Mac to service bundled loans for institutional investors.

Question 28

The home mortgage market really took off in the United States after World War II.

Question 29

In order to be able to create mortgage pools with conventional loans as Fannie Mae did with FHA and VA loans, in 1970 Congress created the

A)Bankers Home Loan Mortgage Corporation (Bobbie Mac).
B)Treasury National Mortgage Facility (Tina McFay).
C)Government National Mortgage Association (Ginnie Mae).
D)Federal Home Loan Mortgage Corporation (Freddie Mac).

Question 30

Explain how the subprime mortgage market, combined with pressure from Washington to create more mortgages, contributed to the housing asset bubble and finally the Great Recession.

Question 31

Why was it difficult for a secondary market for home mortgages to develop in the United States?

Question 32

The first mortgage-backed asset was known as a mortgage pass-through. What are two similar pooled assets now called?

A)Collateralized mortgage obligations (CMOs)and collateralized debt obligations (CDOs)
B)Collateralized mortgage obligations (CMOs)and pooled, unbacked mortgage obligations (PMOs)
C)Mortgage pass-throughs (unbacked pooled mortgages)and collateralized mortgage obligations (CMOs)
D)Collateralized debt obligations (CDOs)and pooled mortgage obligations (PMOs)

Question 33

With a negative amortization home mortgage, the borrower can actually see an increase in the total mortgage balance over the first several years of the loan.

Question 34

Fannie Mae is largely responsible for creating a secondary mortgage market in the United States.

Question 35

The Gaussian copula model that was used to price c ollateralized debt obligations (CDOs)and collateralized mortgage obligations (CMOs)was problematic in what way?

A)There were some incorrect assumptions underlying the model, which caused significant mispricing of CDOs and CMOs.
B)There were some incorrect assumptions underlying the model, rendering it useless in the face of many simultaneous defaults.
C)The model was fairly accurate under almost all conditions, but was ignored when it was most needed.
D)The model was slightly inaccurate and after many widespread applications, the effects of the inaccuracy were multiplied.