Deck 9: Mortgage Markets

Question 1

Pass-through mortgage securities have standard denominations but uncertain cash flow.

Answer 1

True

Question 2

An ARM, compared to a FRM, shifts the interest rate risk from the borrower to the lender.

Answer 2

False

Question 3

Unlike mortgage-backed securities, individual mortgages are issued in standard denominations.

Answer 3

False

Question 4

Mortgage-backed securities are more liquid than individual mortgages.

Question 5

In a conventional mortgage agreement the borrower owns the mortgaged home; the lender takes a lien against the home.

Question 6

Investors in CMO securities are not exposed to prepayment risk.

Question 7

Commercial banks are the largest institutional investor in mortgages.

Question 8

Federal National Mortgage Association (FNMA) is a privately owned corporation with a line of credit from the U.S. Treasury.

Question 9

FHMLC buys FHA/VA insured mortgages from loan originators.

Question 10

Mortgage pool securities have encouraged individuals, insurance companies, and pension funds to provide indirect mortgage financing.

Question 11

Home equity credit lines are a form of second mortgage financing.

Question 12

Mortgage insurance was an important factor in the development of secondary mortgage markets.

Question 13

REMIC securities are a form of collateralized mortgage obligations that provide tax-free income to investor.

Question 14

A lender with a fixed-rate mortgage bears the risk of future inflation.

Question 15

Most mortgage loans are amortized over the maturity of the loan with interest computed on the declining principal.

Question 16

CMO residual tranches have the first claim on the cash flow from a pool of mortgages.

Question 17

Like corporate and municipal bonds, mortgages are issued in standard denominations.

Question 18

Interest rate caps limit the size of the decrease in the loan rate over the loan's life.

Question 19

Mortgage originators may retain the servicing right and fees even though the mortgage has been sold to a governmental agency.

Question 20

Pass-through securities pass through all principal and interest payments collected from homeowners, providing a predictable stream of cash flow to the investor.

Question 21

Which of the following hold the largest percentage of mortgages outstanding in the United States?

A) life insurance companies and pension funds
B) government agencies
C) mortgage pools
D) thrift institutions

Question 22

What is the monthly payment on a $200,000 conventional fixed-rate mortgage, 7 percent, financed for 15 years?

A) $1830
B) $1798
C) $1679
D) $1721

Question 23

The major regulator for the GNMA (Ginnie Mae), FNMA (Fannie Mae), and Federal Home Loan Banks is Federal Housing Finance Agency.

Question 24

A contract designed to use the equity in a home for retirement income without any required payments is called a(n)

A) rollover mortgage
B) reverse annuity mortgage
C) adjustable-rate mortgage
D) home equity loan

Question 25

The largest sector of the capital debt market is associated with

A) corporate bonds
B) mortgages
C) state and municipal bonds
D) U.S. Treasury debt

Question 26

If a 15-years monthly-payment $200,000 mortgage has a 7 percent of annual percentage rate. What is the loan balance after 10 years if paid as agreed?

A) $92,721
B) $83,581
C) $85,492
D) $90,785

Question 27

How long does it take to repay one-half of the principal on a $70,000, 7 percent, 15 year mortgage loan?

A) 75 months
B) 90 months
C) 112 months
D) 123 months
E) 131 months

Question 28

If you were a manager of a thrift institution and you expected interest rates to increase, what type of mortgage would you most like to hold?

A) balloon payment, ten years
B) Rollover mortgage, two years
C) adjustable-rate mortgage, monthly
D) fixed-rate mortgage, 15 years

Question 29

If you added $100 to the monthly payment on a 30-year, $100,000 fixed-rate loan with a 6.5% rate, how soon would your loan be paid off?

A) 249 months
B) 227 months
C) 185 months
D) 278 months
E) 360 months

Question 30

The process of packaging and/or selling mortgages which are then used to back publicly traded debt securities is collateralization.

Question 31

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

Question 32

Which of the following statements is not true of all pass-through securities?

A) They may not be repaid in full for 25 to 30 years.
B) They are viewed by the capital markets as having average maturities of much less than 30 years.
C) Their interest and principal repayments are predictable.
D) They pass through all payments of principal and interest from the underlying pool of mortgages to the investors.

Question 33

What will be the amount of interest paid in the first month of a $50,000, 7 percent, 25 year loan?

A) $305
B) $265
C) $257
D) $292
E) $338

Question 34

You have just purchased a home and borrowed $50,000, 7 percent for 25 years, payable monthly. What is your monthly payment?

A) $338
B) $339
C) $353
D) $369

Question 35

Which of the following is not a reasonable expectation for investors in pass-through mortgage securities?

A) The securities are readily marketable.
B) They have little default risk.
C) The investor receives cash flows in proportion to his/her ownership proportion.
D) The timing of the cash flow return from the securities is quite predictable.
E) All of the above are reasonable expectations for investors in pass-throughs.

Question 36

Which of the following mortgages would you prefer to hold if you were a lender and you expected inflation of uncertain magnitude?

A) reverse annuity mortgages
B) conventional fixed-rate mortgages
C) adjustable-rate mortgage loans
D) balloon payment mortgages

Question 37

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

Question 38

Which one of the following is not true about privately issued passthroughs (PIP)

A) They are similar to "Ginnie Maes" in that they are backed by mortgages that qualify for FHA or VA guarantees.
B) PIPs are issued by private institutions or mortgage bankers.
C) They are similar to "Ginnie Maes" except that they are backed by conventional mortgages that do not qualify for FHA or VA guarantees.
D) They are typically used to securitize large, non-conforming mortgage loans called jumbo loans.

Question 39

What is the monthly payment on a $100,000 fixed rate loan with a 6.5% rate with a term of 30 years?

A) $657
B) $632
C) $638
D) $612

Question 40

Which of the following types of mortgages would be most advantageous to have on your house if you expected the annual rate of inflation would be higher than most people thought?

A) reverse annuity mortgage
B) interest-only mortgage
C) adjustable-rate mortgage
D) fixed-rate mortgage

Question 41

Which of the following is true about GNMA pass-through securities?

A) Interest and principal from borrowers are passed through to investor.
B) Federally insured imply mortgage loans guaranteed by the FHA, VA, and other authorized federal agencies.
C) GNMA pass-throughs are secured by mortgage pools originated by mortgage banks, commercial banks, or other mortgage lending institutions.
D) all of the above

Question 42

Which of the following statements about REMIC securities is false?

A) REMIC securities provide tax-free income to investors.
B) REMIC securities provide level cash flows similar to CMOs.
C) REMIC securities may be backed by pass-through securities issued by FHLMC or FNMA.
D) The Tax Reform Act of 1986 encouraged the use of REMICs.

Question 43

What is the monthly payment on a home costing $150,000, 30 percent down, 25 years at 9 percent?

A) $636.09
B) $881.16
C) $763.31
D) $677.82

Question 44

Which of the following is not a mortgage-backed security?

A) a jumbo mortgage
B) a Ginni Mae pass-through
C) a collateralized mortgage obligation
D) a real estate mortgage investment conduit (REMIC)
E) All of the above are mortgage-backed securities.

Question 45

Like other capital market segments, mortgage markets

A) bring together borrowers and suppliers of long-term funds.
B) are always secured by the pledge of real property.
C) are characterized by small, risky borrowers.
D) issued in standard denominations.
E) all of the above

Question 46

What is most likely to happen to an ARM in a decreasing rate environment?

A) The borrower's payments will increase.
B) The maturity of the loan will be extended.
C) The principal of the loan will increase.
D) The borrower's payments will decrease.

Question 47

Two mortgage investors, who have increased the percentage of mortgages outstanding in the last 20 years, are

A) thrift institutions and commercial banks.
B) commercial banks and insurance companies/pension funds.
C) mortgage pools and thrift institutions.
D) mortgage pools and commercial banks.

Question 48

Hybrid ARMs protect both lender and borrower from interest rate risk because

A) the mortgage payment stays fixed for a time before it begins to vary with interest rates.
B) hybrid ARMs guarantee the lender a fixed return and borrowers a fixed payment for the life of the contract.
C) rates and house payments will vary quite frequently.
D) these mortgages are insured by the FHA.

Question 49

State and local governments make mortgage loans at below-market rates of interest because

A) they want to compete with the thrifts.
B) they want to help local thrift institutions.
C) they can obtain funds for mortgage financing cheaply by selling tax-exempt securities.
D) they lend to lower income, larger home buyers.

Question 50

If you put 30 percent down on a home costing $150,000 with a 25-year, 9% loan, what is the remaining balance on the mortgage after five years?

A) $ 81,450
B) $100,666
C) $ 79,097
D) $84,000
E) $ 97,936

Question 51

The Tax Reform Act of 1986 increased the popularity of home equity lines of credit because

A) tax deductibility of interest for homeowners was reduced.
B) interest incurred under home equity lines was made tax deductible, but interest on other household financing was not.
C) banks and savings and loans were given tax incentives to make home equity lines of credit.
D) the law reduced the rates charged on home equity loans.

Question 52

A savings and loan writing ARMs and expecting mortgage interest rates to decrease in the future would want

A) an interest rate "cap" on their loans.
B) a second mortgage on the home.
C) to lengthen the "adjusting" time period.
D) no limits on the variability of the rates.

Question 53

What will be the amount of interest paid in the first month if you put 30 percent down on a home costing $150,000 with a 25-year, 9% loan?

A) $881.16
B) $702.32
C) $787.50
D) $726.31
E) $583.33

Question 54

Which of the following is not used to adjust ARM rates?

A) Treasury security rates
B) Dow Jones Mortgage Rate Index
C) S&L cost of funds index
D) current fixed-rate mortgage index
E) LIBOR

Question 55

Mortgage-backed securities often have payment patterns that are "doubly convex," which means

A) the contract is very complex.
B) that significant changes in the level of interest rates, up and down, produces losses for the investor.
C) that conventional mortgages have double the default risk than other types of mortgages.
D) that investors are exposed to both interest rate risk and default risk.

Question 56

A savings and loan with a very low net worth position would most likely take which action?

A) invest in conventional fixed-rate loans
B) invest in variable-rate loans
C) make and sell eligible loans to the FHLMC
D) make equity-participation mortgages

Question 57

Amortizing a mortgage loan means that

A) a long-term is converted to a short-term loan.
B) the equity in the house declines as the loan is paid down.
C) the loan is repaid in equal, consecutive payments.
D) interest is paid first entirely, and then the principal

Question 58

An ARM has a 5/1 cap (i.e., the rate cannot increase more than 1 percent per year and 5 percent over the life of the mortgage). What will the mortgage rate be after three years if the initial rate is 5%, and interest rates increase by 2% in each of the first three years of the contract?

A) 6%
B) 7%
C) 8%
D) 9%
E) 10%

Question 59

Hybrid ARMs would be preferred by borrowers

A) seeking a rate lower than comparable fixed rates.
B) who may be selling their home soon.
C) seeking a fixed payment for a few years.
D) all of the above.

Question 60

Private mortgage insurance protects the

A) seller of the home.
B) FHA.
C) borrower.
D) lender.
E) government.

Question 61

Interest rate caps on mortgage loans

A) limit the size of the increase in the loan rate in any year.
B) limit the size of the increase in the loan rate over the life of the loan.
C) are required on all ARMs.
D) both a and b
E) all of the above

Question 62

Mortgage rates, relative to other capital market rates,

A) tend to vary with other rates.
B) tend to be higher than Treasury bond rates.
C) are becoming more uniform across the country.
D) all of the above.

Question 63

Mortgage bankers usually do not

A) permanently fund mortgages
B) originate mortgages
C) service mortgages
D) collect monthly payments from borrowers

Question 64

Which of the following statements is true?

A) All fixed-rate mortgages have interest rate caps.
B) All adjustable-rate-mortgages have interest rate caps.
C) An interest rate cap on a mortgage reduces the lender's interest rate risk exposure.
D) Usually, an annual interest rate cap on a mortgage is 5%, and a lifetime cap is 1- 2%.
E) Both a and b are true.

Question 65

Which of the following is not true about interest-only mortgages?

A) Low payments in initial years (10 to 15 years) - only includes interest on borrowed amount.
B) Low payments in initial years (10 to 15 years) - only includes principal repayment on borrowed amount.
C) After initial period, payments increase such that entire loan amount is amortized by the end of 30 years.
D) None of the above is true.

Question 66

As interest rates rise, the value of PO strips _______ and the value of IO strips _______.

A) decreases; increases
B) increases; decreases
C) does not change; decreases
D) decreases; decreases
E) increases; increases

Question 67

Which of the following is not true about construction-to-permanent mortgages?

A) Bridge financing is provided by lender over the time frame required by the borrower to purchase land and construct the house.
B) Both interest and principal payments are made until construction is completed.
C) Loan is financed in increments as construction payments have to be made.
D) On completion of the construction, loan balance is rolled over into the type of mortgage contract desired by borrower.

Question 68

Which of the following is associated with determining the creditworthiness of a mortgage borrower?

A) income stability
B) job stability
C) prior credit history
D) all of the above

Question 69

Which of the following is not an advantage of investing in mortgage-backed bonds (MBBs) compared to investing in direct mortgages?

A) MBBs are issued in standard denominations.
B) MBBs are issued by individuals with limited credit experience.
C) MBBs are usually insured and highly collateralized.
D) MBBs have cash flow returns similar to corporate bonds.

Question 70

Which of the following statements about FHA and VA mortgages is false?

A) They are insured by the government.
B) They charge for their insurance.
C) They have low down payments.
D) The borrower is protected in case of default.

Question 71

An investor in a first-level CMO tranche with claims on a pool of mortgages is likely to

A) have a much higher risk position than lower level tranches.
B) have more certain returns and less default-risk exposure.
C) wait until all tranches are paid before receiving a return.
D) have lower risk but a much more varied return than lower level tranches.

Question 72

Which of the following is true about reverse annuity mortgages (RAMs)?

A) RAMs allow homeowners to borrow against the equity on their homes at low rates.
B) Typically obtained by older people whose home loans have been paid off, but can use income of the real estate investment they own.
C) Typical term is no more than 20 years and could be for borrower's lifetime as an annuity.
D) Homeowners' equity declines by amount borrowed.
E) All of the above are true.

Question 73

Which of the following is not associated with tightened mortgage credit standards?

A) More time on the current job required.
B) An increase in the required loan/value ratio.
C) A decrease in the maximum total debt payments per month per amount of monthly income.
D) Decreased maximums in the payment/income ratio of borrowers.

Question 74

The original purpose of the Federal Home Loan Mortgage Corporation (Freddie Mac) was to

A) make home loans to low income individuals.
B) purchase the conventional mortgages from thrift institutions.
C) purchase the insured conventional mortgages from financial institutions.
D) purchase the government insured mortgages from thrift institutions.

Question 75

Mortgage bankers are most likely to be involved in the _______ of a mortgage contract.

A) origination
B) funding
C) servicing
D) insuring

Question 76

A prepayment option on a mortgage is similar to a _______ option on a bond.

A) put
B) call
C) conversion
D) default

Question 77

Unlike noncallable corporate bonds, mortgages have _______ risk.

A) default
B) interest rate
C) prepayment
D) both a and c

Question 78

Which of the following statements about balloon payment mortgages is not true?

A) It is a traditional loan where interest is paid until the time when the principal is due.
B) Terms can be 3, 5 or 7 years.
C) Loan is amortized over 15 or 30 year period so that monthly payments are no different than an FRM of equal maturity.
D) Rate is variable over the contract term.
E) All of the above statements are true.

Question 79

Which of the following is associated with a loosening of mortgage credit standards?

A) Increased down payments.
B) Increased loan/value ratios.
C) Decreased in maximum total debt to income ratios
D) Increased required use of mortgage insurance
E) All of the above

Question 80

Mortgages with government or private mortgage insurance

A) are likely to sell at lower prices and lower rates than comparable conventional mortgages.
B) are less likely to default that conventional mortgages.
C) offer the investor less default risk than conventional mortgages.
D) will be written under the credit standards of the originator, and not the standards of the agency or insurance company.