Question 1

The amount of the payment made in excess of the monthly mortgage payment is called a prepayment.

Accepted Answer

A prepayment is any amount paid towards the mortgage that is more than the required monthly payment. This payment can go towards the principal or interest of the mortgage.

Question 2

In regards the risks associated with mortgage origination, price risk is the risk that applicants or those who were issued commitment letters will not close (i.e., complete the transaction by purchasing the property with funds borrowed from the mortgage originator).

Accepted Answer

Price risk in mortgage origination actually refers to the risk that changes in interest rates will change the value of a mortgage or a pool of mortgages, affecting the profitability for the lender or investor. The risk described in the statement is more accurately termed as "fallout risk" or "pipeline risk," which concerns applicants not completing the transaction.

Question 3

Pipeline risk refers to what we call market risk and dropdown risk.

Accepted Answer

Pipeline risk refers to the risk associated with the process of underwriting and distributing new securities, not specifically market risk or dropdown risk.

Question 4

________ is the risk associated with a mortgage's cash flow due to prepayments.

Accepted Answer

Prepayment risk refers to the risk of the mortgage borrower paying off their mortgage earlier than expected, resulting in a loss of interest income for the lender. This can impact the cash flow of the mortgage and is a significant risk to mortgage investors.

Question 5

The maximum loan size for one- to four-family homes changes every year, based on the percentage change in the average home price (for both new and existing homes) published by the Federal Housing Finance Board.

Accepted Answer

This statement is true. The maximum loan size for one- to four-family homes, also known as conforming loan limits, is adjusted annually based on the percentage change in the average home price published by the Federal Housing Finance Board.

Question 6

To protect against price risk, the originator could get a commitment from the GSE or the private conduit from which the mortgage originator plans to buy the mortgage.

Accepted Answer

The originator would seek a commitment from the GSE or private conduit to which they plan to sell the mortgage, not buy it, to protect against price risk.

Question 7

________ is the risk that the homeowner/borrower will default.

Accepted Answer

Credit risk refers to the risk of default by the borrower. Price risk and liquidity risk refer to other types of financial risks. Therefore, option C is the most appropriate choice.

Question 8

Homeowners seldom repay all or part of their mortgage balance prior to the scheduled maturity date.

Accepted Answer

Homeowners often repay all or part of their mortgage balance prior to the scheduled maturity date through refinancing, selling the property, or making extra payments.

Question 9

A component of the cash flow of a fixed-income instrument includes ________.

Accepted Answer

The cash flow of a fixed-income instrument includes all three components: interest, principal repayment (scheduled principal repayment or amortization), and prepayment.

Question 10

Prepayment risk is the risk associated with a mortgage's cash flow due to ________. More specifically, investors are concerned that borrowers will pay off a mortgage when prevailing mortgage rates fall ________ the loan's note rate.

Accepted Answer

Prepayment risk refers to the possibility that the borrower of a mortgage will pay off the loan earlier than expected, resulting in a loss for the investor who purchased the mortgage. When the prevailing mortgage rates fall below the loan's note rate, borrowers are more likely to refinance their mortgage, which increases the prepayment risk for investors. Therefore, choice C, prepayments below the loan's note rate, is the best option.

Question 11

In regards the risks associated with mortgage origination, price risk refers to the adverse effects on the value of the pipeline if mortgage rates in the market rise.

Accepted Answer

Price risk in mortgage origination does refer to the potential negative impact on the value of the pipeline if mortgage rates increase. This is because higher rates may decrease demand for mortgages, which can result in decreased profits or losses for mortgage originators.

Question 12

Freddie Mac and Fannie Mae receive a charter from the federal government that ________.

Accepted Answer

Freddie Mac and Fannie Mae receive a charter from the federal government that allows them to operate with certain benefits that are available to other corporations. These benefits include access to cheaper funding and exemption from state and local income taxes. However, their business activities are subject to certain limits and regulations imposed by the government.

Question 13

One of the underwriting standards is the loan balance at the time of origination. Conventional loans that meet the underwriting standards of the two GSEs are called conforming limits. But there are other important underwriting standards that must be satisfied. These include ________.

Accepted Answer

All of the listed options are important underwriting standards that must be satisfied in order for a loan to meet the standards of the two GSEs. Documentation and borrower credit history, loan type and type of property, and loan-to-value ratio by loan type and transaction type are all considered in the underwriting process.

Question 14

The main risks faced by investors when investing in residential mortgage loans include ________.

Accepted Answer

Credit risk and liquidity risk are the main risks faced by investors when investing in residential mortgage loans. Credit risk involves the possibility of borrowers defaulting on their loan payments, while liquidity risk refers to the difficulty in selling the mortgage or converting it into cash without significant loss.

Question 15

Mortgage originators can protect themselves against fallout risk by entering into an agreement with a government-sponsored enterprises (GSE) or private conduit for mandatory rather than optional delivery of the mortgage.

Accepted Answer

The answer of Mortgage originators can protect themselves against fallout...

Question 16

The principal investors in mortgage loans include ________.

Accepted Answer

Principal investors in mortgage loans include thrifts and commercial banks, as they are major sources of residential mortgage financing.

Question 17

Fannie Mae and Freddie Mac can buy or sell any type of ________, but the mortgages that are packaged into securities are restricted to ________ and those that satisfy their underwriting guidelines.

Accepted Answer

Fannie Mae and Freddie Mac are government-sponsored entities that deal with residential mortgages. They can buy or sell any type of mortgage, but the ones that are packaged into securities are typically restricted to residential mortgages that meet their underwriting guidelines. Therefore, option B (residential mortgage; government loans) is the best choice.

Question 18

Which of the below statements is TRUE?

Accepted Answer

The answer of Which of the below statements is TRUE?
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Question 19

Two government-sponsored enterprises and several private companies buy mortgages for purposes of pooling them and selling them to investors.

Accepted Answer

This statement is true. Fannie Mae and Freddie Mac are the two government-sponsored enterprises that buy mortgages, and private companies such as investment banks and hedge funds also participate in this market. They pool these mortgages together and sell them as mortgage-backed securities to investors.

Question 20

Freddie Mac and Fannie Mae are GSEs whose mission is to provide liquidity and support to the ________.

Accepted Answer

Freddie Mac and Fannie Mae provide liquidity and support to the mortgage market by buying and guaranteeing mortgage loans, which helps to free up funds for more lending and creates more activity in the housing market.

Quiz 22: The Residential Mortgage Market