Question 1

The mortgage default rate is
A)the percentage of home mortgage loans in which the borrower has failed to make the current monthly payment.
B)equal to the foreclosure rate.
C)the percentage of home mortgages in which the borrower is 90 days or more late with the payment or it is in the foreclosure process.
D)the percentage of home mortgages in which the borrower owes more than the home is worth.

Accepted Answer

The mortgage default rate is the percentage of home mortgages in which the borrower is 90 days or more late with the payment or it is in the foreclosure process. It is not the same as the foreclosure rate, which only measures the homes actually being foreclosed upon. It also differs from the percentage of borrowers who owe more than the home is worth, which is known as negative equity.

Question 2

Which of the following is most central to the understanding of the economic crisis of 2008?
A)the decline of the stock market in late 2007
B)the housing boom (2001-2005) and bust (2007-2008)
C)the sharp rise in oil prices in 2008
D)unethical investment practices beginning in 2000

Accepted Answer

The housing boom and subsequent bust was the primary cause of the economic crisis of 2008. The housing market collapse triggered a chain reaction that led to a sharp decrease in consumer spending, financial institutions suffering losses, and ultimately, a global economic recession. The other options may have contributed to the crisis, but the housing bubble was the primary underlying factor.

Question 3

During 1979-2005, the mortgage default rate
A)was less than the foreclosure rate.
B)soared to more than 5 percent during recessions but declined sharply during economic expansions.
C)soared to more than 5 percent during expansions but declined sharply during economic recessions.
D)was generally between 1 and 2 percent.

Accepted Answer

D

Question 4

After a period of price stability in the 1990s, housing prices increased dramatically during 2002-2005 because
A)regulations designed to make housing more affordable increased the demand for housing and drove housing prices upward.
B)regulations designed to make housing more affordable decreased the number of sub-prime loans and made home buying a safer investment.
C)mortgage lending standards tightened, and therefore mortgage loans for housing were only available to buyers purchasing highly expensive homes.
D)home buyers were putting more money down and requiring more return on their investment, driving housing prices up.

Accepted Answer

Regulations designed to make housing more affordable, such as the Community Reinvestment Act and Affordable Housing Goals, increased the demand for housing and drove housing prices upward. This was further exacerbated by the easy availability of subprime mortgage loans, which allowed buyers with lower credit scores to purchase more expensive homes, leading to a housing bubble.

Question 5

During the 1980s and 1990s, the Federal Reserve's monetary policy focused primarily on
A)keeping short-term interest rates low in order to stimulate real output and economic growth.
B)a variety of factors, such as unemployment and real GDP, resulting in variable inflation rates throughout this period.
C)keeping inflation low and the general price level relatively stable.
D)monetary expansion in order to reduce unemployment.

Accepted Answer

The Federal Reserve's monetary policy during the 1980s and 1990s focused primarily on keeping inflation low and the general price level relatively stable. This is also known as maintaining price stability, which is a key mandate of the Federal Reserve. By keeping inflation in check, the Fed aimed to provide a stable environment for economic growth and to prevent hyperinflation, which can have severe economic consequences.

Question 6

Based on the rising housing prices of 2000-2005, many buyers opted for interest-only loans and variable rate mortgages with little or no down payment because
A)they expected short-term interest rates to fall substantially in the future and this would reduce their monthly mortgage payment in the years ahead.
B)variable rate mortgages are a good way to reduce the risk accompanying your investment when you plan to stay in the house for a long time.
C)they thought housing prices would continue to rise and therefore they would be able to sell the house for a profit within a couple of years.
D)they could easily recoup their investment, even if there was a downturn in housing prices in the future.

Accepted Answer

Buyers believed that housing prices would continue to rise and therefore they would be able to sell the house for a profit within a couple of years. This led them to choose interest-only loans and variable rate mortgages with little or no down payment, as they expected to make a profit on the sale of the house rather than paying off the mortgage over time.

Question 7

Many investment banks quickly collapsed when the housing market collapsed because
A)the Federal Reserve was unwilling to provide them with short-term loans.
B)they ignored the risk assigned by the rating agencies, resulting in leverage ratios that were too low.
C)new regulations required investment banks to maintain more capital against their residential housing loans than was true for commercial business loans.
D)they were highly leveraged and had little reserves on hand to meet the short-term debt obligations of the mortgage-backed securities.

Accepted Answer

Investment banks were highly leveraged, meaning they had borrowed significant amounts of money to fund their investments. When the housing market collapsed, the value of their mortgage-backed securities plummeted, leaving them with significant losses and little reserves on hand to meet their short-term debt obligations. This led to many investment banks quickly collapsing. The other choices given do not accurately explain why investment banks collapsed during this time.

Question 8

Regulatory policies requiring lenders to extend more low down-payment loans to higher-risk borrowers along with the Fed's low short-term interest rate policy during 2002-2004 caused
A)housing prices to fall during that period.
B)a reduction in the use of adjustable rate mortgages to finance the purchase of housing.
C)a reduction in housing construction during 2002-2005.
D)mal-investment, that is, excessive investment in housing construction during 2002-2005.

Accepted Answer

The regulatory policies and the Fed's low short-term interest rate policy during 2002-2004 encouraged excessive investment in housing construction, which resulted in a housing bubble. This led to mal-investment, meaning investment that was not based on sound economic principles, but rather was artificially encouraged by the policies in place at the time. This ultimately contributed to the housing market crash of 2008.

Question 9

Since 1995, federal regulations have
A)tightened mortgage lending standards and therefore made it difficult to obtain a loan to purchase a house.
B)increased the down payment housing buyers are required to make in order to obtain a mortgage loan.
C)loosened lending standards and made it possible for many buyers to purchase a house with little or no down payment.
D)required investment banks to maintain more capital against their holdings of mortgage loans.

Accepted Answer

The answer of Since 1995, federal regulations have
A)tightened mortgage lending...

Question 10

Which of the following was the result of Fannie Mae and Freddie Mac being both privately-owned and government-sponsored enterprises?
A)Their government sponsorship increased their cost of acquiring loanable funds.
B)They were unable to earn profits and pay dividends to their shareholders.
C)Congressional regulations exerted little or no impact on their business operations.
D)Their activities were more susceptible to political influence and favoritism.

Accepted Answer

Being both privately-owned and government-sponsored enterprises, Fannie Mae and Freddie Mac were susceptible to political influence and favoritism. This was because while they operated as private companies, they also enjoyed government sponsorship, which made them subject to political pressures and regulatory interventions.

Question 11

What was the original stated purpose of Fannie Mae and Freddie Mac?
A)to allow the government to extend loans directly to low-income and minority households
B)to help provide liquidity in the secondary mortgage markets
C)to operate as non-profit entities that would provide competition for for-profit mortgage companies
D)to take on mortgages going into default in order to prevent them from going into foreclosure

Accepted Answer

The original stated purpose of Fannie Mae and Freddie Mac was to provide liquidity in the secondary mortgage markets by purchasing mortgages from primary lenders and packaging them into mortgage-backed securities. This allowed lenders to replenish their capital and make more loans, thereby expanding homeownership.

Question 12

Between 2001 and 2005, sub-prime (including Atl-A) mortgages ____________ as a share of the total.
A)fell from 30 percent to less than 10 percent
B)rose from 5 percent to 10 percent
C)rose from 10 percent to more than 30 percent
D)fell from more than 20 percent to less than 10 percent

Accepted Answer

The question states that sub-prime mortgages "rose as a share of the total" between 2001 and 2005. The only answer choice that fits this description is C, which indicates a rise from 10 percent to more than 30 percent. The other answer choices indicate a decrease or a minimal increase, which is not consistent with the question.

Question 13

A sub-prime loan is a loan extended to borrowers
A)at a subsidized interest rate below the prime rate normally offered to the most creditworthy borrowers.
B)with blemished credit or limited documentation of their income, employment history, and other indicators of credit worthiness.
C)seeking a 30-year, fixed rate mortgage.
D)who have a FICO score above 660.

Accepted Answer

Sub-prime loans are specifically designed for borrowers with poor credit histories, limited income verification, and other indicators of risk. They typically come with higher interest rates to offset the increased risk of default. Therefore, option B is the best choice. Option A describes a subsidized loan and option D describes a loan for borrowers with good credit, which are not characteristics of sub-prime loans. Option C describes a specific type of mortgage, but it does not necessarily relate to sub-prime lending.

Question 14

Regulatory policies requiring lenders to extend more low down-payment loans to higher-risk borrowers along with the Fed's low short-term interest rate policy during 2002-2004 caused
A)an increase in demand for housing and higher housing prices.
B)an increase in demand for housing and lower housing prices.
C)a reduction in demand for housing and higher housing prices.
D)a reduction in demand for housing and lower housing prices.

Accepted Answer

Regulatory policies and low interest rates made it easier for higher-risk borrowers to get low down-payment loans, which increased demand for housing. This increased demand led to higher housing prices.

Question 15

An analysis of housing prices between 1987 and 2008 indicates that prices
A)increased sharply in the five years leading up to the housing bust in 2007.
B)were relatively stable before dropping sharply in 2001.
C)rose steadily during the 1990s, but declined sharply beginning in 2001.
D)were erratic, but there was no discernable trend during either the 1990s or 2000-2006.

Accepted Answer

The answer of An analysis of housing prices between 1987...

Question 16

Fannie Mae and Freddie Mac's rapid increase in the percentage of all mortgages held encouraged mortgage lenders to
A)tighten credit standards and decrease the number of sub-prime loans extended to borrowers.
B)offer lower rates than what Fannie Mae and Freddie Mac could offer.
C)lower credit standards and offer terms acceptable to Fannie Mae and Freddie Mac.
D)scrutinize the credit-worthiness of borrowers and require higher down payments on mortgages.

Accepted Answer

The answer of Fannie Mae and Freddie Mac's rapid increase...

Question 17

Fannie Mae and Freddie Mac's dominance of the secondary mortgage market during 1995-2008 encouraged mortgage originators to
A)extend only 30-year, fixed-rate mortgages.
B)require higher down payments in order to obtain a home mortgage.
C)loosen lending standards as long as the mortgages were acceptable to Fannie Mae and Freddie Mac.
D)scrutinize the credit-worthiness of borrowers more carefully.

Accepted Answer

Fannie Mae and Freddie Mac's dominance in the secondary market incentivized mortgage originators to loosen lending standards as long as the mortgages met the requirements set by Fannie Mae and Freddie Mac. This led to an increase in risky lending practices such as subprime lending and low-quality loans being packaged and sold to investors as mortgage-backed securities.

Question 18

In 2008-2009, which of the following weakened the demand stimulus effects of expansionary fiscal policy?
A)the unwillingness of the federal government to run budget deficits
B)the heavy indebtedness of American households
C)a high level of household spending on big-ticket items such as houses and cars, which do not promote economic growth
D)the continuation of the high saving rates on the part of Americans

Accepted Answer

The heavy indebtedness of American households weakened the demand stimulus effects of expansionary fiscal policy because households were already carrying a lot of debt, which made them less likely to spend any additional income or savings resulting from tax cuts or increased government spending.

Question 19

Which of the following contributed to the soaring housing prices during 2002-2004?
A)the Fed's high-interest rate policy
B)the tightening of loan standards by commercial lenders
C)the increasing popularity of fixed-rate, long-term loans to lock in low interest rates
D)the Fed's low-interest rate policy

Accepted Answer

The Fed's low-interest rate policy contributed to the soaring housing prices during 2002-2004 because it made borrowing cheaper and more accessible, leading to increased demand for homes and driving up prices.

Question 20

As short-term interest rates began to rise in 2005, which one of the following mortgage loan categories experienced the largest increase in default and foreclosure rates?
A)fixed rate mortgages to prime borrowers
B)fixed rate mortgages to sub-prime borrowers
C)adjustable rate mortgages extended to both prime and sub-prime borrowers
D)adjustable rate mortgages to sub-prime borrowers only; the default and foreclosure rates of these loans extended to prime borrowers declined

Accepted Answer

Adjustable rate mortgages extended to both prime and sub-prime borrowers experienced the largest increase in default and foreclosure rates. This is because the rise in short-term interest rates affected the interest rates on these mortgages, causing higher monthly payments that many borrowers could not afford to pay.

Quiz 20: Appendix: the Crisis of 2008: Causes and Lessons for the Future

The mortgage default rate is

Which of the following is most central to the understanding of the economic crisis of 2008?

During 1979-2005, the mortgage default rate

After a period of price stability in the 1990s, housing prices increased dramatically during 2002-2005 because

During the 1980s and 1990s, the Federal Reserve's monetary policy focused primarily on

Based on the rising housing prices of 2000-2005, many buyers opted for interest-only loans and variable rate mortgages with little or no down payment because

Many investment banks quickly collapsed when the housing market collapsed because

Regulatory policies requiring lenders to extend more low down-payment loans to higher-risk borrowers along with the Fed's low short-term interest rate policy during 2002-2004 caused

Since 1995, federal regulations have

Which of the following was the result of Fannie Mae and Freddie Mac being both privately-owned and government-sponsored enterprises?

What was the original stated purpose of Fannie Mae and Freddie Mac?

Between 2001 and 2005, sub-prime (including Atl-A) mortgages ____________ as a share of the total.

A sub-prime loan is a loan extended to borrowers

Regulatory policies requiring lenders to extend more low down-payment loans to higher-risk borrowers along with the Fed's low short-term interest rate policy during 2002-2004 caused

An analysis of housing prices between 1987 and 2008 indicates that prices

Fannie Mae and Freddie Mac's rapid increase in the percentage of all mortgages held encouraged mortgage lenders to

Fannie Mae and Freddie Mac's dominance of the secondary mortgage market during 1995-2008 encouraged mortgage originators to

In 2008-2009, which of the following weakened the demand stimulus effects of expansionary fiscal policy?

Which of the following contributed to the soaring housing prices during 2002-2004?

As short-term interest rates began to rise in 2005, which one of the following mortgage loan categories experienced the largest increase in default and foreclosure rates?