Deck 26: Securitization

Question 1

Depository institutions have followed and originate-to-distribute model of loan origination only since the Financial Services Modernization Act of 1999.

Answer 1

False

Question 2

The three government agencies that sponsor the creation of mortgage-backed,pass through securities are: GNMA,FNMA,and FDIC.

Answer 2

False

Question 3

Securitization of assets increases the FI's capital requirements.

Answer 3

False

Question 4

Investors in a Structured Investment Vehicle (SIV)have no direct right to the cash flows on the underlying portfolio of the SIV.

Question 5

GNMA is more active in the market for mortgage pass-through securities than either FNMA or FHLMC.

Question 6

FNMA does not hold the mortgages it purchases on its balance sheet,thereby transferring credit and default risk to investors purchasing its securities.

Question 7

GNMA will sponsor any pool of loans regardless of the size of each individual loan in the pool.

Question 8

FNMA supports only those pools of mortgages that comprise mortgage loans whose default or credit risk is insured by one of three government agencies.

Question 9

Individual mortgage loans in a pool sponsored by FNMA or FHLMC must be non-assumable if the property is sold.

Question 10

On September 7,2008,FNMA and FHLMC were placed under conservatorship and both are controlled by a federal government agency.

Question 11

When a Special Purpose Vehicle (SPV)creates asset-backed securities,the SPV retains ownership of the original assets.

Question 12

Historically,FNMA has a secured line of credit with the U.S.Treasury.

Question 13

GNMA is a privately-owned entity.

Question 14

The life of a Structured Investment Vehicle (SIV)is not tied to any particular asset class that it is responsible for securitizing.

Question 15

Unlike GNMA,FNMA will securitize conventional mortgages issued by depository institutions.

Question 16

Despite the complexity of measuring the risk of asset-backed securities,credit rating agencies continued to use their own measures to quantify risks involved.

Question 17

GNMA helps create pass-through asset-backed securities by providing timing insurance.

Question 18

The availability of a liquid secondary market for asset-backed securities provided an incentive for FIs to follow an originate-to-distribute strategy of loan origination.

Question 19

The securities that form a GNMA pass-through are U.S.Treasury bonds,bills,and notes.

Question 20

FNMA securitizes conventional mortgage loans as well as FHA/VA insured loans.

Question 21

Mortgage pools that are assumed to prepay at a rate of speed that is more rapid than the PSA model would indicate,are said to prepay at less than 100 percent PSA behavior because the mortgage life and balance will exist for a longer time.

Question 22

The weighted-average life of a loan is always greater than the duration of the loan.

Question 23

Prepayment models are attempts by professional mortgage portfolio managers to estimate the rate of prepayment on given mortgage pools.

Question 24

GNMA pass-through bondholders can be protected against default risk by FHA/VA housing insurance.

Question 25

Investors in GNMA pass-through securities are exposed to the risk that the originating bank may fail,and the risk that the trustee may mismanage monthly interest and principal payments collected.

Question 26

All tranches in a collateralized mortgage obligation (CMO)have the same prepayment risk exposure.

Question 27

Prepayment risk means that realized cash flows on pass-through securities may be more than expected cash flows.

Question 28

It is advantageous for the residential mortgage holder to refinance because market interest rates on new mortgages are less than interest rates on existing mortgages.

Question 29

Current statistics show that the servicing fee depository institutions can earn by securitizing through GNMA approximates 44 basis points.

Question 30

A good news effect of increased mortgage prepayments on a mortgage pool caused by decreasing market interest rates includes the receipt of fewer scheduled interest payments.

Question 31

Full amortization of a thirty-year fixed rate mortgage means that monthly payments are equal and include both principal and interest.

Question 32

The call option held by the residential mortgage holder is in the money when market interest rates are less than the interest rate on an existing mortgage.

Question 33

GNMA pass-through can assist an FI in resolving duration mismatch and illiquidity risk problems.

Question 34

CMOs are typically created from existing GNMA pass-through securities that are held in trust.

Question 35

One advantage of asset securitization to a bank is the ability to originate new assets before the original assets have matured.

Question 36

One cause of residential mortgage prepayment risk is the sale of the mortgaged property.

Question 37

All else equal,once a mortgage pool has aged,prior prepayments of mortgages in the pool have no bearing on the current value of the pool or the future prepayment rates of mortgages left in the pool.

Question 38

The ability to refinance a mortgage with no prepayment penalty gives the borrower a long-term put option on interest rates.

Question 39

A bad news effect of increased mortgage prepayments on a mortgage pool caused by decreasing market interest rates includes a reduction in the discount rate on the mortgage cash flow.

Question 40

Early prepayments on mortgages backing a CMO are normally allocated to the earliest existing tranche maturity.

Question 41

A commercial bank operating under an originate-to-distribute model is acting most like

A)an asset transformer.
B)an asset broker.
C)a portfolio lender.
D)an asset accumulator.

Question 42

Certificates of Amortizing Revolving Debts are asset-backed securities that have a claim on automobile installment loans.

Question 43

The packaging of loans into asset pools and then selling portions of the pool to investors is known as

A)security creation.
B)securitization.
C)loan transfer.
D)loan collateralization.

Question 44

Which type of loans are securitized most often?

A)Residential mortgages.
B)Credit card loans.
C)Auto loans.
D)Student loans.

Question 45

Mortgage-backed bonds differ from CMOs and pass-through securities in that there is no direct link between the cash flows on the mortgages and the interest and principal payments on the bonds.

Question 46

Which of the following is not accomplished by securitization of assets?

A)Increases the liquidity of assets.
B)Provides a new source of funds.
C)Increases the costs of monitoring.
D)Decreases the duration of assets.

Question 47

An interest-only (IO)mortgage-backed strip is a rare example of a negative duration asset.

Question 48

Which of the following is the more traditional form of off-balance sheet subsidiary for removing loans from the FIs balance sheet?

A)Special Purpose Vehicle (SPV)
B)Asset-Backed Structure (ABS)
C)Structured Investment Vehicle (SIV)
D)Collateralized Mortgage Operation (CMO)

Question 49

The discount effect and the prepayment effect are negatively correlated in their impact on the value of a principal-only (PO)mortgage-backed strip security.

Question 50

Most mortgage-backed bond issues conducted by depository institutions are under-collateralized.

Question 51

A principal-only (PO)mortgage pass-through strip security is attractive to investors that wish to increase the interest rate sensitivity of their portfolio.

Question 52

An interest-only (IO)mortgage pass-through strip has a claim on the present value of interest payments on the mortgages in a GNMA pool.

Question 53

A principal only (PO)mortgage-backed strip is attractive to investors who wish to speculate about decreasing interest rates.

Question 54

A mortgage pass-through strip security is a special type of collateralized mortgage obligation (CMO).

Question 55

The value of an interest-only (IO)mortgage-backed strip is not sensitive to changes in current market interest rates.

Question 56

Mortgage-backed bonds are a form of on-balance-sheet securitization.

Question 57

The creation and sale of CMOs is based,at least in part,on the ability to segment the market for pass-through security products.

Question 58

At market rates substantially below the mortgage coupon rate of an interest-only (IO)mortgage-backed strip,the prepayment effect will dominate the discount effect resulting in a decrease in the price of the IO strip.

Question 59

When FIs form off-balance sheet subsidiaries to remove assets from their balance sheet,the subsidiary activities

A)are regulated as though they are part of the parent institution.
B)occur beyond the reach of existing state and federal monitoring and regulation.
C)are monitored and regulated by the Securities and Exchange Commission (SEC).
D)are reported to the National Association of Securities Dealers (NASD).

Question 60

Which of the following is a primitive form of asset securitization?

A)Loan sales.
B)Pass-through security.
C)Collateralized mortgage obligation.
D)Mortgage-backed bond.

Question 61

The Government National Mortgage Association

A)is a private corporation owned by shareholders.
B)purchases pools of mortgages originated by FIs.
C)provides timing insurance to investors in mortgage-backed securities.
D)only approves conventional and FHA/VA insured mortgages.

Question 62

Which of the following is a source of prepayment risk on a typical FNMA mortgage-backed pass-through security?

A)Refinancing.
B)Default risk.
C)Housing turnover.
D)Non-assumable mortgages.
E)All of the options.

Question 63

Which of the following government agencies or government-sponsored enterprises are NOT directly involved in the creation of mortgage-backed pass-through securities?

A)Government National Mortgage Association.
B)Farmers Home Administration.
C)Federal National Mortgage Association.
D)Federal Home Loan Mortgage Corporation.

Question 64

The characteristics of a Collateralized Mortgage Obligation (CMO)securities issue include all of the following EXCEPT

A)the tranches will have different coupon rates.
B)the CMO securities are insured separately from the GNMA pass-through securities.
C)the principal payments are made totally to the earliest remaining tranche.
D)GNMA pass-through securities are used as collateral in a trust to support the CMOs.

Question 65

Which of the following statements is true regarding Special Purpose Vehicles (SPVs)and structured investment vehicles (SIVs)?

A)An SPV has no contingent credit risk when it sells asset-backed securities (ABSs)with recourse to investors.
B)An SPV retains the rights to the loans that are used as collateral in an asset-backed security.
C)An SIV potentially has more liquidity risk than the sponsoring FI due to the short-term nature of the liabilities and their reliance on short-term funds.
D)An SPV is allowed to accept deposits while the SIV must rely solely on other borrowings.

Question 66

Servicing a pass-through security refers to

A)an FI processing of all payments.
B)an FI provision of clearing services to set up the pass-through.
C)broker/dealer services provided by the FI to the ultimate holders of the pass-through.
D)guarantee by the FI of all principal and interest payments.

Question 67

One difference between a special purpose vehicle (SPV)and a structured investment vehicle (SIV)is

A)there is no difference;these are just two different names for the same type of subsidiary.
B)the SPV has stockholders that share in the profits;the SIV only has debt.
C)the SIV ceases to exist when the loans in its portfolio cease to exist;the SPV outlives its loan portfolio.
D)the SPV is allowed to accept deposits while the SIV must rely solely on other borrowings.
E)the SIV raises funds first and then acquires loans from the sponsoring FI;the SPV receives the loans first and creates an asset-backed security which it sells and transfers the funds back to the sponsoring FI.

Question 68

Which of the following factors occurred in the early 2000s and created concerns about the ability of Fannie Mae and Freddie Mac to manage their portfolios of assets?

A)Fannie Mae miscalculated the value of its mortgages that created a restatement of its stockholder equity.
B)Both agencies overcharged lenders for services they provided.
C)Fannie Mae operated for some time with a sharp increase in interest rate risk on its balance sheet.
D)All of the options.

Question 69

The life span of an SPV (Special Purpose Vehicle)is limited to

A)the life of the sponsoring FI.
B)the duration of its liabilities.
C)the life of the asset-backed security that it created from the loans in its portfolio.
D)the life is unlimited as it can exist beyond its initial purpose.

Question 70

All else equal,advantages of a DI operating as an asset broker in regard to mortgages includes all of the following EXCEPT

A)lower regulatory taxes.
B)increased fee-based income.
C)increased liquidity.
D)decreased asset and liability duration mismatch.
E)increased capital requirements.

Question 71

As of 2015,the amount of mortgage-backed securities outstanding was approximately

A)$2.9 trillion.
B)$5.1 trillion.
C)$7.8 trillion.
D)$11.0 trillion.

Question 72

One difference between a Special Purpose Vehicle (SPV)and a Structured Investment Vehicle (SIV)is that the

A)SIV can potentially earn an expected spread between its high-yielding assets and the relatively short-term,low cost funds that it borrows in addition to servicing fees.
B)SPV retains ownership of the loans while the SIV sells the loans without recourse so the loan rights are transferred to the investor.
C)SPV may have a line of credit or a loan commitment from the sponsoring institution if a loan goes bad and it cannot make payments to investors;the SIV has no such arrangement.
D)SIV is just passing cash flows it receives through to the ultimate investor;the SPV has fixed payment obligations that must be met regardless of cash flows received on the loan portfolio.

Question 73

Which of the following assets have not been securitized by FIs?

A)Mortgages.
B)Credit card receivables.
C)Auto loans.
D)Debts of Lesser Developed Countries (LCD debt).

Question 74

Investors in mortgage-backed pass-through securities are exposed to a variety of risks.Compared to other fixed-income securities,the most unique of these risks is

A)prepayment risk.
B)default risk.
C)credit risk.
D)interest rate risk.

Question 75

Which of the following is an incentive to securitize mortgage assets?

A)To reduce the regulatory tax burden on the FI.
B)To adjust the gap exposure of the FI.
C)To improve the liquidity of the FI.
D)To generate non-interest sensitive fee income.
E)All of the options.

Question 76

On September 7,2008,both FHMA and FHLMC were placed under conservatorship by the

A)Federal Reserve.
B)Federal Housing Finance Agency.
C)Federal Deposit Insurance Corporation.
D)Federal Home Loan Bank.

Question 77

Which of the following good news and bad news effect is NOT true when mortgage interest rates decline,resulting in faster repayments?

A)Lower market yields reduce the discount rates on any mortgage cash flows and increase the present value of any given stream of cash flows (good news effect).
B)Low yields lead to faster prepayment of the mortgage pool's principal (good news effect).
C)With early prepayments comes fewer interest payments in absolute terms (bad news effect).
D)Faster cash flows due to prepayments can only be reinvested at lower interest rates (bad news effect).
E)Faster cash flows due to prepayments can be reinvested at higher interest rates (good news effect).

Question 78

Which of the following are functions of GNMA?

A)Engaging in swap transactions where it swaps mortgage-backed securities with an FI for original mortgages.
B)Sponsors mortgage-backed securities programs by FIs such as banks,thrifts,and mortgage bankers.
C)Acts as a guarantor to investors in mortgage-backed securities regarding the timely pass-through of principal and interest payments on their sponsored bonds.
D)All of the options.
E)Sponsors mortgage-backed securities programs by FIs such as banks,thrifts,and mortgage bankers and acts as a guarantor to investors in mortgage-backed securities regarding the timely pass-through of principal and interest payments on their sponsored bonds.

Question 79

Which is the oldest mortgage-backed security sponsoring agency?

A)GNMA.
B)FNMA.
C)FHA.
D)FMHA.

Question 80

Which of the following is NOT a factor that may cause the prepayment risk on a pool of mortgages to differ from the PSA's assumed pattern?

A)The age of the mortgage pool.
B)Geographic location.
C)Seasons in the year in which the mortgage was originated.
D)Full or partial amortization of the payments.