Deck 19: The Secondary Mortgage Market: Pass-Through Securities

Question 1

Prices of mortgage pass-through securities are:

A) unaffected by changes in interest rates.
B) related positively to changes in interest rates.
C) more sensitive to declines in interest rates and less sensitive to increases in interest rates.
D) less sensitive to declines in interest rates and more sensitive to increases in interest rates.

Answer 1

less sensitive to declines in interest rates and more sensitive to increases in interest rates.

Question 2

Which of the following is FALSE concerning Mortgage-Backed Bonds (MBB)

A) Issuer retains ownership of mortgages.
B) Maturity is indefinite at issuance.
C) Issued with fixed coupon rates.
D) Usually underwritten by investment banking companies.

Answer 2

Maturity is indefinite at issuance.

Question 3

When pricing mortgage pass-through securities,issuers use all of the following methods to include prepayment assumptions except:

A) FHA prepayment experiences.
B) thepool factor technique.
C) thePSA model.
D) constant rates of prepayment.

Answer 3

thepool factor technique.

Question 4

Which of the following is not a guarantee of GNMA (or Ginnie Mae)?

A) Timely payments of principal and interest.
B) Settling accounts with servicer.
C) All mortgages would be paid off at maturity.
D) Upon default they will repay outstanding loan balance.

Question 5

The Government National Mortgage Association (GNMA)was organized to perform three principal functions.Which of the following was NOT a function of GNMA?

A) Provide special assistance lending in support of federal programs
B) Manage and liquidate mortgages previously acquired by FNMA
C) Manage all secondary mortgage market operations
D) Provide a guarantee for FHA - VA mortgage pools that would provide a guarantee for mortgage backed securities

Question 6

Compared to mortgage pass-though securities (MPTs),MBBs should be priced:

A) toprovide lower yields than MPTs,because of lower prepayment risk.
B) toprovide higher yields than MPTs,because of higher prepayment risks.
C) toprovide the same yield as MPTs,because of equivalent amounts of prepayment risk.
D) none of the above.

Question 7

Under the HUD Act of 1968,the assets,liabilities,and management of secondary market operations were transferred to a completely private corporation known as "Ginnie Mae" (GNMA).

Question 8

Which of the following developments assured mortgage investors that they would receive interest and principal payments at little or no risk?

A) The availability of hazard and title insurance
B) The availability of mortgage default insurance and loan guarantees
C) The development of standardized loan underwriting,processing,and servicing
D) All of the above

Question 9

When issuing mortgage-backed bonds,the issuer transfers ownership of the underlying mortgage to the investors/bondholders.

Question 10

Which of the following statements regarding mortgage-backed bonds is generally true?

A) The total value of the MBBs issued usually equals the value of the mortgages in the underlying pool
B) Unlike corporate bonds,MBBs usually are issued with variable coupon rates of interest
C) Overcollateralization of the mortgage pool assures investors that the income from mortgage will be sufficient to pay the interest on bonds,as well as,the principal upon maturity
D) All of the above

Question 11

Marking the mortgage to market is the process of accumulating mortgage pools and marketing them to individual investors as mortgage-backed bonds.

Question 12

When market interest rates exceed the coupon rate of a MBB,the price of the bond will be greater than its par value.

Question 13

When evaluating an investment in mortgage pass-through securities,several important characteristics of the underlying mortgage pool should be considered.Which of the following is NOT an important characteristic?

A) The amount of overcollateralization of the mortgage pool
B) The geographic distribution of the mortgages
C) The amount of seasoned mortgages included in the pool
D) None of the above are important in the evaluation of mortgage pass-through securities

Question 14

Which of the following is not a risk listed for Mortgage-Backed Securities?

A) Default risk
B) Delayed payment risk
C) Pass-through risk
D) Interest rate risk

Question 15

The primary purpose of FHLMC (or Freddie Mac)is to

A) Provide a secondary market for mortgage originators.
B) Provide investors with a guaranteed rate of return.
C) Create competition for Fannie Mae and Ginnie Mae.
D) Provide consumers with more options when deciding on a mortgage loan.

Question 16

The investment rating for mortgage backed Bond depends on all but which of the following?

A) Appraised value and DCR.
B) Interest rates in mortgage pool.
C) Extent of over collateralization.
D) Initial price paid for the security.

Question 17

The Federal Home Loan Mortgage Corporation's (FHLMC)primary purpose is to provide liquidity for conventional mortgage originators just as FNMA and GNMA did for originators of FHA - VA mortgages.

Question 18

Ceteris paribus,the more seasoned a mortgage is:

A) thegreater the likelihood of prepayment.
B) thegreater the likelihood of default.
C) thegreater the likelihood that the mortgage will be carried to maturity.
D) allof the above.

Question 19

If a mortgage pool consists of five 10% FRMs totaling $500,000,five 9% FRMs totaling $450,000 and ten 8% FRMs totaling $750,000,what is the weighted average coupon (WAC)rate?

A) 8.75%
B) 8.85%
C) 9.00%
D) None of the above

Question 20

The pass-through rate is the coupon rate of interest promised by the issuer of a pass-through security to the investor.In most instances,the pass-through rate is:

A) equal to the average rate of interest on all mortgages in the underlying pool.
B) lower than the lowest rate of interest on any mortgage in the underlying mortgage pool.
C) higher than the highest rate of interest on any mortgage in the underlying mortgage pool.
D) None of the above.

Question 21

The standard PSA prepayment curve referred to in (TF 18-19)is known as a 1 percent PSA.

Question 22

The standard PSA prepayment curve assumes prepayments of 2% and 4% in years 1 and 2,then 6% each year thereafter.

Question 23

A mortgage pass-through security represents an undivided ownership interest in a pool of mortgage held by a trustee.

Question 24

When a pass-through security investor makes repetitive requests of a mortgagor it is referred to as a nuisance call.

Question 25

Generally,prices for zero coupon mortgage-backed bonds are more sensitive to interest rate changes than interest bearing MBBs.