Deck 14: The Mortgage Markets

Question 1

(I)Conventional mortgages are originated by private lending institutions, and FHA or VA loans are originated by the government. (II)Conventional mortgages are insured by private companies, and FHA or VA loans are insured by the government.

A)(I)is true, (II)false.
B)(I)is false, (II)true.
C)Both are true.
D)Both are false.

Answer 1

(I)is false, (II)true.

Question 2

Which of the following reduces moral hazard for the mortgage borrower?

A)collateral
B)down payments
C)private mortgage insurance
D)borrower qualifications

Answer 2

down payments

Question 3

Which of the following is true of mortgage interest rates?

A)Mortgage rates are closely tied to Treasury bond rates, but mortgage rates tend to stay below Treasury rates because mortgages are secured with collateral.
B)Longer-term mortgages have higher interest rates than shorter-term mortgages.
C)Interest rates are higher on mortgage loans on which lenders charge points.
D)All of the above are true.
E)Only A and B of the above are true.

Answer 3

Longer-term mortgages have higher interest rates than shorter-term mortgages.

Question 4

During the early years of an amortizing mortgage loan, the lender applies

A)most of the monthly payment to the outstanding principal balance.
B)all of the monthly payment to the outstanding principal balance.
C)most of the monthly payment to interest on the loan.
D)all of the monthly payment to interest on the loan.
E)the monthly payment equally to interest on the loan and the outstanding principal balance.

Question 5

Which of the following are important ways in which mortgage markets differ from stock and bond markets?

A)The usual borrowers in capital markets are government entities, whereas the usual borrowers in mortgage markets are small businesses.
B)The usual borrowers in capital markets are government entities and large businesses, whereas the usual borrowers in mortgage markets are small businesses.
C)The usual borrowers in capital markets are government entities and large businesses, whereas the usual borrowers in mortgage markets are small businesses and individuals.
D)The usual borrowers in capital markets are businesses and government entities, whereas the usual borrowers in mortgage markets are individuals.

Question 6

Typically, discount points should not be paid if the borrower will pay off the loan in ________ years or less.

A)5
B)10
C)15
D)20

Question 7

Which of the following are important ways in which mortgage markets differ from the stock and bond markets?

A)The usual borrowers in the capital markets are government entities and businesses, whereas the usual borrowers in the mortgage markets are individuals.
B)Most mortgages are secured by real estate, whereas the majority of capital market borrowing is unsecured.
C)Because mortgages are made for different amounts and different maturities, developing a secondary market has been more difficult.
D)All of the above are important differences.
E)Only A and B of the above are important differences.

Question 8

During the last years of an amortizing mortgage loan, the lender applies

A)most of the monthly payment to the outstanding principal balance.
B)all of the monthly payment to the outstanding principal balance.
C)most of the monthly payment to interest on the loan.
D)all of the monthly payment to interest on the loan.
E)the monthly payment equally to interest on the loan and the outstanding principal balance.

Question 9

Which of the following are true of mortgages?

A)A mortgage is a long-term loan secured by real estate.
B)A borrower pays off a mortgage in a combination of principal and interest payments that result in full payment of the debt by maturity.
C)Over 80 percent of mortgage loans finance residential home purchases.
D)All of the above are true of mortgages.
E)Only A and B of the above are true of mortgages.

Question 10

Which of the following protects the mortgage lender's right to sell property if the underlying loan defaults?

A)a lien
B)a down payment
C)private mortgage insurance
D)borrower qualification
E)amortization

Question 11

Borrowers tend to prefer ________ to ________, whereas lenders prefer ________.

A)fixed-rate loans; ARMs; fixed-rate loans
B)ARMs; fixed-rate loans; fixed-rate loans
C)fixed-rate loans; ARMs; ARMs
D)ARMs; fixed-rate loans; ARMs

Question 12

A borrower who qualifies for an FHA or VA loan enjoys the advantage that

A)the mortgage payment is much lower.
B)only a very low or zero down payment is required.
C)the cost of private mortgage insurance is lower.
D)the government holds the lien on the property.

Question 13

Which of the following are true of mortgages?

A)More than 80 percent of mortgage loans finance residential home purchases.
B)The National Banking Act of 1863 rewarded banks that increased mortgage lending.
C)Most mortgages during the 1920s and 1930s were balloon loans.
D)All of the above are true.
E)Only A and C of the above are true.

Question 14

Which of the following is true of mortgage interest rates?

A)Longer-term mortgages have higher interest rates than shorter-term mortgages.
B)In exchange for points, lenders reduce interest rates on mortgage loans.
C)Mortgage rates are lower than Treasury bond rates because of the tax deductibility of mortgage interest payments.
D)All of the above are true.
E)Only A and B of the above are true.

Question 15

Which of the following are true of mortgage interest rates?

A)Interest rates on mortgage loans are determined by three factors: current long-term market rates, the term of the mortgage, and the number of discount points paid.
B)Mortgage interest rates tend to track along with Treasury bond rates.
C)The interest rate on 15-year mortgages is lower than the rate on 30-year mortgages, all else the same.
D)All of the above are true.
E)Only A and B of the above are true.

Question 16

Which of the following are true of mortgages?

A)A mortgage is a long-term loan secured by real estate.
B)Borrowers pay off mortgages over time in some combination of principal and interest payments that result in full payment of the debt by maturity.
C)Less than 65 percent of mortgage loans finance residential home purchases.
D)All of the above are true of mortgages.
E)Only A and B of the above are true of mortgages.

Question 17

Which of the following is true of mortgage interest rates?

A)Longer-term mortgages have lower interest rates than shorter-term mortgages.
B)Mortgage rates are lower than Treasury bond rates because of the tax deductibility of mortgage interest rates.
C)In exchange for points, lenders reduce interest rates on mortgage loans.
D)All of the above are true.
E)Only A and B of the above are true.

Question 18

During the last years of a balloon mortgage loan, the lender applies

A)most of the monthly payment to the outstanding principal balance.
B)all of the monthly payment to the outstanding principal balance.
C)most of the monthly payment to interest on the loan.
D)all of the monthly payment to interest on the loan.
E)the monthly payment equally to interest on the loan and the outstanding principal balance.

Question 19

During the early years of a balloon mortgage loan, the lender applies

A)most of the monthly payment to the outstanding principal balance.
B)all of the monthly payment to the outstanding principal balance.
C)most of the monthly payment to interest on the loan.
D)all of the monthly payment to interest on the loan.
E)the monthly payment equally to interest on the loan and the outstanding principal balance.

Question 20

(I)ARMs offer lower initial rates and the rate may fall during the life of the loan. (II)Conventional mortgages do not allow a borrower to take advantage of falling interest rates.

A)(I)is true, (II)is false.
B)(I)is false, (II)is true.
C)Both are true.
D)Both are false.

Question 21

Growing-equity mortgages (GEMs)

A)help the borrower pay off the loan in a shorter time.
B)have such low payments in the first few years that the principal balance increases.
C)offer borrowers payments that are initially lower than the payments on a conventional mortgage.
D)do all of the above.
E)do only A and B of the above.

Question 22

Distinct elements of a mortgage loan include

A)origination.
B)investment.
C)servicing.
D)all of the above.
E)only B and C of the above.

Question 23

The share of the mortgage market held by savings and loans is

A)over 50 percent.
B)approximately 40 percent.
C)approximately 20 percent.
D)less than 10 percent.

Question 24

Ginnie Mae

A)insures qualifying mortgages.
B)insures pass-through certificates.
C)insures collateralized mortgage obligations.
D)does only A and B. of the above
E)does only B and C of the above.

Question 25

With an option ARM loan, the borrower has an option to

A)reduce the monthly interest rate being charged.
B)reduce the monthly payment, possibly increasing the mortgage balance from one month to the next.
C)increase the outstanding balance by increasing the monthly payment.
D)Both A and C are correct.

Question 26

Mortgage-backed securities

A)have been growing in popularity in recent years as institutional investors look for attractive investment opportunities.
B)are securities collateralized by a pool of mortgages.
C)are securities collateralized by both insured and uninsured mortgages.
D)are all of the above.
E)are only A and B of the above.

Question 27

Retired people can live on the equity they have in their homes by using a

A)GEM.
B)GPM.
C)SAM.
D)RAM.

Question 28

The most common type of mortgage-backed security is

A)the mortgage pass-through, a security that has the borrower's mortgage payments pass through the trustee before being disbursed to the investors.
B)collateralized mortgage obligations, a security which reduces prepayment risk.
C)the participation certificate, a security which passes the borrower's mortgage payments equally among all the owners of the certificates.
D)the securitized mortgage, a security which increases the liquidity of otherwise illiquid mortgages.

Question 29

The interest rate borrowers pay on their mortgages is determined by

A)current long-term market rates.
B)the term.
C)the number of discount points.
D)all of the above.

Question 30

The Federal Housing Administration (FHA)

A)was set up to buy mortgages from thrifts so that these institutions could make more loans.
B)funds purchases of mortgages by selling bonds to the public.
C)provides insurance for certain mortgage contracts.
D)does all of the above.
E)does only A and B of the above.

Question 31

Second mortgages serve the following purposes:

A)they give borrowers a way to use the equity they have in their homes as security for another loan.
B)they allow borrowers to get a tax deduction on loans secured by their primary residence or vacation home.
C)they allow borrowers to convert their conventional mortgages into GEMs.
D)all of the above.
E)only A and B of the above.

Question 32

A loan-servicing agent will

A)package the loan for an investor.
B)hold the loan in their investment portfolio.
C)collect payments from the borrower.
D)do both A and C of the above.
E)do both B and C of the above.

Question 33

A borrower with a 30-year loan can create a GEM by

A)simply increasing the monthly payments beyond what is required and designating that the excess be applied entirely to the principal.
B)converting his ARM into a conventional mortgage.
C)converting his conventional mortgage into an ARM.
D)converting his conventional mortgage into a GPM.

Question 34

________ issues participation certificates, and ________ provides federal insurance for participation certificates.

A)Freddie Mac; Freddie Mac
B)Freddie Mac; Ginnie Mae
C)Ginnie Mae; Freddie Mac
D)Ginnie Mae; Ginnie Mae
E)Freddie Mac; no one

Question 35

Which of the following is a disadvantage of a second mortgage compared to credit card debt?

A)The loans are secured by the borrower's home.
B)The borrower gives up the tax deduction on the primary mortgage.
C)The borrower must pay points to get a second mortgage loan.
D)The borrower will find it more difficult to qualify for a second mortgage loan.

Question 36

Which of the following are useful for home buyers who expect their income to fall in the future?

A)GPMs
B)RAMs
C)GEMs
D)Only A and B are useful.
E)Only A and C are useful.

Question 37

Which of the following are useful for home buyers who expect their income to rise in the future?

A)GPMs
B)RAMs
C)GEMs
D)Only A and B are useful.
E)Only A and C are useful.

Question 38

REMICs are most like

A)Freddie Mac pass-through securities.
B)Ginnie Mae pass-through securities.
C)participation certificates.
D)collateralized mortgage obligations.

Question 39

The share of the mortgage market held by commercial banks is approximately

A)50 percent.
B)25 percent.
C)15 percent.
D)5 percent.

Question 40

The Federal National Mortgage Association (Fannie Mae)

A)was set up to buy mortgages from thrifts so that these institutions could make more loans.
B)funds purchases of mortgages by selling bonds to the public.
C)provides insurance for certain mortgage contracts.
D)does all of the above.
E)does only A and B of the above.

Question 41

During the early years of a mortgage loan, the lender applies most of the payment to the principal on the loan.

Question 42

An advantage of a graduated-payment mortgage is that borrowers will qualify for a larger loan than if they requested a conventional mortgage.

Question 43

Which of the following terms are found in mortgage loan contracts to protect the lender from financial loss?

A)collateral
B)down payment
C)private mortgage insurance
D)all of the above

Question 44

Private mortgage insurance is a policy that guarantees to make up any discrepancy between the value of the property and the loan amount, should a default occur.

Question 45

Nearly half the funds for mortgage lending comes from mortgage pools and trusts.

Question 46

A point on a mortgage loan refers to one monthly payment of principal and interest.

Question 47

Down payments are designed to reduce the likelihood of default on mortgage loans.

Question 48

Closing for a mortgage loan refers to the moment the loan is paid off.

Question 49

One important advantage to a borrower who qualifies for an FHA or VA loan is the very low interest rate on the mortgage.

Question 50

Between 2000 and 2005, home prices increased an average of ________ per year.

A)2%
B)4%
C)8%
D)12%

Question 51

A loan for borrowers who do not qualify for loans at the usual market rate of interest because of a poor credit rating or because the loan is larger than justified by their income is

A)a subprime mortgage.
B)a securitized mortgage.
C)an insured mortgage.
D)a graduated-payment mortgage.

Question 52

Discount points (or simply points)are interest payments made at the beginning of a loan.

Question 53

Mortgage interest rates loosely track interest rates on three-month Treasury bills.

Question 54

Many institutions that make mortgage loans do not want to hold large portfolios of long-term securities, because it would subject them to unacceptably high interest-rate risk.

Question 55

The percentage of the total loan paid back immediately when a mortgage loan is obtained, which lowers the annual interest rate on the debt, is called

A)discount points.
B)loan terms.
C)collateral.
D)down payment.

Question 56

What factors are used in determining a person's FICO score?

A)past payment history
B)outstanding debt
C)length of credit history
D)all of the above

Question 57

Adjustable-rate mortgages generally have lower initial interest rates than fixed-rate mortgages.

Question 58

From 2000 to 2005, housing prices increased, on average, by over 40%. This runup in prices was caused by

A)speculators.
B)an increase in subprime loans, which increased demand for new and existing houses.
C)both A and B.
D)None of the above are correct.

Question 59

A problem that initially hindered the marketability of mortgages in a secondary market was that they were not standardized.

Question 60

Mortgage-backed securities have declined in popularity in recent years as institutional investors have sought higher returns in other markets.

Question 61

How does an amortizing mortgage loan differ from a balloon mortgage loan?

Question 62

An option ARM mortgage gives the borrower the option to reduce the monthly interest being charged on the mortgage.

Question 63

How has the modern mortgage market changed over recent years?

Question 64

What are the benefits and side effects of securitized mortgages?

Question 65

What are mortgage-backed securities, why were they developed, what types of mortgage-backed securities are there, and how do they work?

Question 66

Why has the online lending market developed in recent years and what are the advantages and disadvantages of this development?

Question 67

Fannie Mae and Freddie Mac together either own or insure the risk on nearly one-fourth of America's residential mortgages.

Question 68

Explain the features of mortgage loans that are designed to reduce the likelihood of default.

Question 69

Mortgage-backed securities are marketable securities collateralized by a pool of mortgages.

Question 70

What are points? What is their purpose?

Question 71

Discuss the pros and cons of a subprime market for residential mortgages in the U.S.

Question 72

A FICO score below 660 is considered good while a score above 720 is likely to cause problems in obtaining a loan.

Question 73

Why may Fannie Mae and Freddie Mac pose a threat to the health of the financial system?

Question 74

Subprime loans are those made to borrowers who do not qualify for loans at the usual market rate of interest because of a poor credit rating or because the loan is larger than justified by their income.

Question 75

Evaluate the advantages and disadvantages, from both the lender's and borrower's perspectives, of fixed-rate and adjustable-rate mortgages.