Deck 9: Securitization

Question 1

Securitization involves

A) The process of issuing stocks and bonds
B) Underwriting risky debt
C) The process of placing illiquid loans into a pool to create a relatively liquid security
D) Dealer financing of inventories of securities

Answer 1

The process of placing illiquid loans into a pool to create a relatively liquid security

Question 2

To address asymmetric information problems in pools of securitized loans

A) Maximum loan-to-value ratios are used
B) Minimum credit scores are used
C) Loan originators are required to retain risk exposure to loans made
D) All of the above

Answer 2

All of the above

Question 3

The first securitized pools were created from

A) Commercial and industrial (business) loans
B) Mortgages
C) Credit card receivables
D) Motor vehicle loans

Answer 3

Mortgages

Question 4

MBSs and other securitized pools are referred as pass-throughs because

A) Cash flows from assets in the pool pass through to investors
B) Ownership of the assets passes through from the originator to the investor
C) Underlying loans can be prepaid at the discretion of the borrower
D) The underlying assets in the pool are amortized

Question 5

Private-label mortgage pools include

A) Jumbo mortgages
B) Alt-A mortgages
C) Subprime mortgages
D) All of the above

Question 6

Issuers of securitized assets add to the appeal to investors by

A) Overcollateralizing the pool
B) Having private insurers insure the underlying assets in the pool
C) Having credit rating agencies assign a credit rating to the pool
D) All of the above

Question 7

Collateralized loan obligations (CLOs) involve

A) Motor vehicle loans
B) Commercial and industrial (business) loans
C) Mortgage loans
D) All of the above

Question 8

Structured securities

A) Are based on MBSs, ABSs, or CMBSs
B) Contain a residual or Z tranche
C) Parse the underlying cash flows into different securities
D) All of the above

Question 9

CMOs typically use mortgage-backed securities to

A) Create separate securities having different maturities
B) Blend with junk bonds to reduce risk through diversification
C) Reduce the volatility of cash flows
D) Satisfy regulatory requirements

Question 10

Securitization has

A) Reduced the effectiveness of monetary policy
B) Reduced the efficiency of credit markets
C) Increased the integration of credit markets
D) Added to the cost of credit

Question 11

Risks to investors in Ginnie Mae MBSs arise from

A) Defaults of the underlying mortgages
B) Default by Ginnie Mae
C) Unpredictable cash flows from prepayments
D) Lack of collateralization

Question 12

The financial crisis

A) Set back Ginnie Mae securities
B) Set back Fannie Mae and Ginnie Mae securities
C) Set back private-label MBS
D) Gave the securitization process a much-needed boost