Deck 7: Mortgage Markets

Question 1

A subprime mortgage is a mortgage made to a borrower who has a below normal credit rating.

Answer 1

True

Question 2

GNMA role is to provide insurance to pass through mortgage securities.

Answer 2

True

Question 3

Federally insured mortgages are called conventional mortgages.

Answer 3

False

Question 4

In synthetic securitization,the transfer of risk on a pool of assets is achieved by the use of credit derivatives or guarantees to a third party.

Question 5

If a borrower makes a 20 percent down payment on a conventional mortgage,she will be required to obtain

A)FHA insurance.
B)VA insurance.
C)private mortgage insurance.
D)GNMA payment guarantees
E)None of these choices are correct.

Question 6

Rank the following types of mortgages by amount outstanding from largest to smallest.
I. Home mortgages
II. Multifamily mortgages
III. Farm mortgages
IV. Commercial mortgages

A)I,II,III,IV
B)I,II,IV,III
C)II,I,IV,III
D)IV,II,III,I
E)I,IV,II,III

Question 7

The largest category of mortgages by dollar volume is commercial mortgages.

Question 8

A borrower using a conventional mortgage will have to put up at least a 20 percent down payment or purchase private mortgage insurance.

Question 9

The process of packaging and/or selling mortgages that are then used to back publicly traded debt securities is called

A)collateralization.
B)securitization.
C)market capitalization.
D)stock diversification.
E)mortgage globalization.

Question 10

A ________ placed against mortgaged property ensures that the property cannot be sold (except by the lender)until the mortgage is paid off.

A)collateral
B)lien
C)writ of habeas corpus
D)down payment
E)writ of certiorari

Question 11

For CMOs,prepayment risk is the risk that a borrower may prepay the mortgage before maturity when interest rates decrease.

Question 12

A large portion of the mortgage payment goes towards the principal,during the early life of a mortgage loan.

Question 13

Risk attributes of collateralized mortgage obligations differ based on tranches.

Question 14

On a fixed-rate mortgage the dollars of interest the homeowner pays falls each year the mortgage is outstanding.

Question 15

Subprime mortgage borrowers usually have poorer credit ratings or lower income levels compared to conventional mortgage borrowers.

Question 16

The process of mortgage securitization results in a separation between mortgage origination and mortgage financing.

Question 17

Pass through mortgage securities are for primary market investors.

Question 18

Discount points are paid to reduce the down payment required.

Question 19

Private mortgage insurance (and hence,that part of the homeowner's monthly payment)is automatically removed from a mortgage when the loan-to-value ratio on the mortgage falls below 80 percent.

Question 20

Mortgage payments are ________ on a 15-year fixed-rate mortgage than on a 30-year fixed-rate mortgage,and ________ is paid on a 15-year mortgage than on a 30-year mortgage; ceteris paribus.

A)lower; less interest
B)lower; less principal
C)higher; less interest
D)higher; more principal
E)higher; more interest

Question 21

The FHA charges the homeowner ________ to insure an FHA mortgage.

A)nothing
B)0.5 percent of the loan amount
C)$500
D)1 percent of the loan amount
E)$1,500

Question 22

A borrower took out a 30-year fixed-rate mortgage of $2,250,000 at a 7.2 percent annual rate. After five years,he wishes to pay off the remaining balance. Interest rates have by then fallen to 7 percent. How much must he pay to retire the mortgage (to the nearest dollar)?

A)$2,122,426
B)$2,225,330
C)$2,015,678
D)$2,212,041
E)$1,999,998

Question 23

You want to buy a $250,000 house and you will use a conventional mortgage. What is the minimum down payment you have to make to avoid having to purchase mortgage insurance?

A)$10,000
B)$20,000
C)$30,000
D)$40,000
E)$50,000

Question 24

A(n)________ is used to help retired people receive monthly income in exchange for the equity in their home.

A)SAM
B)Equity Participation Mortgage
C)RAM
D)PLAM
E)GEM

Question 25

An MBB differs from a CMO or a pass-through in that
I. the MBB does not result in the removal of mortgages from the balance sheet.
II. a MBB holder has no prepayment risk.
III. cash flows on a MBB are not directly passed through from mortgages.

A)I,II,and III
B)I and II only
C)II and III only
D)I and III only
E)I only

Question 26

Which of the following statements about mortgage markets is/are true?
I. Mortgage companies service more mortgages than they originate.
II. Servicing fees typically range from 2 percent to 4 percent.
III. Most mortgage sales are with recourse.
IV. The government is involved in the residential mortgage markets.

A)I,III,and IV only
B)II,III,and IV only
C)I,II,and IV only
D)II and III only
E)I and IV only

Question 27

Mortgage fees paid by the homeowner at,or prior to,closing upon the purchase of a house typically include all but which one of the following?

A)Application fee
B)Title search fee
C)Title insurance fee
D)Appraisal fee
E)Prepayment penalty

Question 28

A $25,000 face value GNMA pass-through quote sheet lists a spread to average life of 103,PSA of 220,and a price of 101-09. This means that
I. the pass-through yield is 103 basis points above the comparable maturity Treasury bond.
II. the pass-through is being prepaid more quickly than standard PSA.
III. the pass-through is priced at $25,272.50.

A)I,II,and III are correct.
B)I and II only
C)I and III only
D)II and III only
E)III only

Question 29

A homeowner can obtain a $250,000,30-year fixed-rate mortgage at a rate of 6.0 percent with zero points or at a rate of 5.5 percent with 2.25 points.
How long must the owner stay in the house to make it worthwhile to pay the points if the payment saving is invested monthly?

A)7.15 years
B)3.33 years
C)6.04 years
D)5.90 years
E)More than 30 years

Question 30

With a fixed-rate mortgage,the ________ bears the interest rate risk and with an ARM the ________ bears the interest rate risk.

A)borrower; lender
B)borrower; borrower
C)lender; lender
D)lender; borrower
E)federal government; pool organizer

Question 31

You obtain a $265,000,15-year fixed-rate mortgage. The annual interest rate is 6.25 percent. In addition to the principal and interest paid,you must pay $275 a month into an escrow account for insurance and taxes. What is the total monthly payment (to the nearest dollar)?

A)$2,272
B)$1,632
C)$2,547
D)$1,907
E)$2,311

Question 32

A homeowner could take out a 15-year mortgage at a 5.5 percent annual rate on a $195,000 mortgage amount,or she could finance the purchase with a 30-year mortgage at a 6.1 percent annual rate. How much total interest over the entire mortgage period could she save by financing her home with the 15-year mortgage (to the nearest dollar)?

A)$230,408
B)$190,105
C)$155,612
D)$144,325
E)$138,612

Question 33

You purchase a $255,000 house and you pay 20 percent down. You obtain a fixed-rate mortgage where the annual interest rate is 5.85 percent and there are 360 monthly payments. What is the monthly payment?

A)$1,215.27
B)$1,203.48
C)$1,194.45
D)$1,367.22
E)$1,504.35

Question 34

The least used form of mortgage securitization is the ________.

A)second mortgage
B)mortgage-backed bond
C)mortgage pass-through
D)CMO
E)home equity loan

Question 35

A homeowner can obtain a $250,000,30-year fixed-rate mortgage at a rate of 6.0 percent with zero points or at a rate of 5.5 percent with 2.25 points.
How long must the owner stay in the house to make it worthwhile to pay the points if the payment saving is not invested?

A)7.15 years
B)3.33 years
C)6.04 years
D)5.90 years
E)More than 30 years

Question 36

Which of the following statements about GNMA is/are true?
I. GNMA provides timing insurance.
II. GNMA creates pools of mortgages and issues securities.
III. GNMA insures only FHA,VA,HUD's Office of Indian and Public Housing,and USDA Rural Development loans.
IV. GNMA requires that all mortgages in the pool have the same interest rate.

A)I,II,III,and IV are true.
B)I,III,and IV only
C)I,II,and III only
D)II,III,and IV only
E)III and IV only

Question 37

A homeowner can obtain a $250,000,30-year fixed-rate mortgage at a rate of 6.0 percent with zero points or at a rate of 5.5 percent with 2.25 points.
If you will keep the mortgage for 30 years,what is the net present value of paying the points (to the nearest dollar)?

A)$9,475
B)$8,360
C)$7,564
D)$7,222
E)$6,578

Question 38

You purchase a $325,000 town home and you pay 25 percent down. You obtain a 30-year fixed-rate mortgage with an annual interest rate of 5.75 percent. After five years you refinance the mortgage for 25 years at a 5.1 percent annual interest rate. After you refinance,what is the new monthly payment (to the nearest dollar)?

A)$1,422
B)$1,401
C)$1,366
D)$1,335
E)$1,296

Question 39

A home buyer bought a house for $245,000. The buyer paid 20 percent down but decided to finance closing costs of 3 percent of the mortgage amount. If the borrower took out a 30-year fixed-rate mortgage at a 5 percent annual interest rate,how much interest will the borrower pay over the life of the mortgage?

A)$224,655
B)$180,622
C)$228,477
D)$188,265
E)$248,575

Question 40

The schedule showing how monthly mortgage payments are split into principal and interest is called a(n)

A)securitization schedule.
B)balloon payment schedule.
C)graduated payment schedule.
D)amortization schedule.
E)growing equity schedule.

Question 41

Why were CMOs created?

Question 42

A homeowner is looking to buy a home in Marvin Gardens. The most he can afford to pay in total is $1,800 per month. Yearly property taxes will be about $3,000 (escrowed monthly)and insurance is $110 per month. There are no other costs.
If mortgage rates are 6.25 percent for a 30-year fixed-rate mortgage,how large can his mortgage be?

Question 43

As compared to fixed-rate mortgages,ARMs result in which of the following for the lender?
I. Higher interest rate risk
II. Lower default risk
III. Greater prepayment penalty fees

A)I,II,and III
B)I and II only
C)II and III only
D)I and III only
E)None of these choices are correct.

Question 44

A homeowner is looking to buy a home in Marvin Gardens. The most he can afford to pay in total is $1,800 per month. Yearly property taxes will be about $3,000 (escrowed monthly)and insurance is $110 per month. There are no other costs.
If his parents give him $20,000 for a down payment,what is the most he can pay for a house with a 15-year mortgage if the interest rate is 5.50 percent?

Question 45

A Collateralized mortgage obligation (CMO)has:

A)no interest rate risk.
B)no default risk.
C)no prepayment risk.
D)high degree of interest rate risk.
E)no default,no prepayment and no interest rate risks.

Question 46

Which one of the following entities is an actual government-owned enterprise dealing with mortgages?

A)GNMA
B)FNMA
C)FHLMC
D)PIP
E)CMO

Question 47

Why have FNMA and Freddie Mac,considered government-sponsored enterprises (GSEs),been in the news lately? Explain.

Question 48

Which one of the following types of mortgages is likely to become more popular as the average age of the U.S. population increases?

A)GEM
B)GPM
C)SAM
D)PLA
E)RAM

Question 49

You bought your house five years ago and you believe you will be in the house only about five more years before it gets too small for your family. Your original home value when you bought it was $250,000,you paid 20 percent down,and you financed closing costs equal to 3 percent of the mortgage amount. The mortgage was a 30-year fixed-rate mortgage with a 6.5 percent annual interest rate. Rates on 30-year mortgages are now at 5 percent if you pay 2 points. Your refinancing costs will be 1.5 percent of the new mortgage amount (excluding points). You won't finance the points and closing costs this time. A new down payment is not required. Should you refinance? Ignore all taxes and show your work.

Question 50

What three major ways has the federal government assisted the mortgage markets? Explain.

Question 51

Explain each term of the following pass-through quote:

Question 52

If the current interest environment is low,lenders tend to prefer ________ ; while borrowers tend to prefer ________.

A)ARM; fixed-rate mortgage
B)ARM; ARM
C)fixed-rate mortgage; fixed-rate mortgage
D)fixed-rate mortgage; ARM
E)None of these choices are correct.

Question 53

A fixed-rate mortgage originator is adversely affected by ________ interest rates while the borrower is adversely affected by ________ interest rates.

A)increasing; decreasing
B)increasing; increasing
C)decreasing; decreasing
D)decreasing; increasing
E)stable; decreasing

Question 54

An adjustable rate mortgage originator is adversely affected by ________ interest rates while the borrower is adversely affected by ________ interest rates.

A)increasing; decreasing
B)increasing; increasing
C)decreasing; decreasing
D)decreasing; increasing
E)stable; decreasing

Question 55

The borrower of an amortized mortgage makes most of the payment during the early life of the mortgage:

A)towards the principal.
B)towards the interest.
C)equally towards the principal and interest.
D)mostly towards the principal rather than interest.
E)None of these choices are correct.

Question 56

Who are the major buyers of mortgages after they have been originated? What is the difference between selling with recourse or without recourse? Which is most common?

Question 57

One fixed-rate mortgage pool has a 750 PSA and a second fixed-rate pool has 150 PSA. The pool with the higher PSA ________ than the pool with the lower PSA.
I. probably has a higher coupon
II. probably has lower default risk
III. will mature more quickly

A)I,II,and III
B)I and II only
C)II and III only
D)I and III only
E)I only

Question 58

Construct an amortization schedule for the first three months and the final three months of payments for a 30-year,7 percent mortgage in the amount of $90,000. What percentage of the third payment is principal? What percentage of the final payment is principal? What do these differences imply? (Hint: The balance after the 357th payment is $1,775.56.)

Question 59

How does GNMA improve mortgage marketability?

Question 60

Why do mortgage lenders prefer ARMs while many borrowers prefer fixed-rate mortgages,ceteris paribus.