Deck 19: The Secondary Mortgage Market: Pass-Through Securities

Question 1

One difference between mortgage securities and corporate bonds is that mortgage securities tend to be "overcollateralized."

Answer 1

True

Question 2

A mortgage pass-through security represents an undivided ownership interest in a pool of mortgage held by a trustee.

Answer 2

True

Question 3

When market interest rates exceed the coupon rate of a MBB, the price of the bond will be greater than its par value.

Answer 3

False

Question 4

Marking the mortgage to market is the process of accumulating mortgage pools and marketing them to individual investors as mortgage-backed bonds.

Question 5

When issuing mortgage-backed bonds, the issuer transfers ownership of the underlying mortgage to the investors/bondholders.

Question 6

Generally, prices for zero coupon mortgage-backed bonds are more sensitive to interest rate changes than interest bearing MBBs.

Question 7

Which of the following developments assure mortgage investors they will receive interest and principal payments at little or no risk?

A) The availability of hazard and title insurance
B) The availability of mortgage default insurance and loan guarantees
C) The development of standardized loan underwriting, processing, and servicing
D) All of the above

Question 8

Using the same information as the question above, assume that 20 years after the bond is issued, bond market investors require a 15 percent interest rate on the bond. What is the market price of the bond?

A) $6,835
B) $6,863
C) $7,653
D) $14,270

Question 9

The secondary mortgage market enables mortgage banking companies to sell existing mortgages and thereby replenish funds with which new loans can be originated.

Question 10

When a pass-through security investor makes repetitive requests of a mortgagor it is referred to as a nuisance call.

Question 11

The Federal Home Loan Mortgage Corporation's FHLMC) primary purpose is to provide liquidity for conventional mortgage originators just as FNMA and GNMA did for originators of FHA - VA mortgages.

Question 12

An optional delivery commitment, gives Fannie Mae the right but not the obligation) to purchase mortgage loans from originators.

Question 13

Under the HUD Act of 1968, the assets, liabilities, and management of secondary market operations were transferred to a completely private corporation known as "Ginnie Mae" GNMA).

Question 14

The standard PSA prepayment curve assumes prepayments of 2% and 4% in years 1 and 2, then 6% each year thereafter.

Question 15

A 25-year maturity mortgage-backed bond is issued. The bond has a par value of $10,000 and promises to pay an 8 percent annual coupon. At issue, bond market investors require a 12 percent interest rate on the bond. What is the initial price on the bond?

A) $588
B) $6,835
C) $6,863
D) $14,270

Question 16

A falling rate of market interest would have which of the following impacts on a mortgage pass-through security?

A) Increase prepayments on loans in the pool
B) Decrease prepayments on loans in the pool
C) Decrease the market value of the MPT
D) Both A and C
E) Both B and C

Question 17

A rising rate of market interest would have which of the following impacts on a mortgage pass-through security?

A) Increase the market value of the MPT
B) Decrease the market value of the MPT
C) Increase or decrease, depending on whether the MPT was issued at a premium or a discount
D) The market rate of interest has no impact on the market value of a MPT

Question 18

A 10-year maturity mortgage-backed bond is issued. The bond is a zero coupon bond that promises to pay $10,000 par) after 10 years. At issue, bond market investors require a 15 percent interest rate on the bond. What is the initial price on the bond?

A) $2,252
B) $2,472
C) $8,696
D) $10,000

Question 19

In 2008, Fannie Mae was spun off in an initial public offering as a private company.

Question 20

Which of the following is NOT a major type of mortgage-related securities?

A) Mortgage-backed bonds MBBs)
B) Mortgage pass-through securities MPTs)
C) American depositary receipts ADRs)
D) Collateralized mortgage obligations CMOs)
E) All of the above are mortgage-related securities

Question 21

Compared to mortgage pass-though securities MPTs), MBBs should be priced to provide:

A) Lower yields, because of lower prepayment risk
B) Higher yields, because of higher prepayment risks
C) The same yields, because of equivalent amounts of prepayment risk
D) None of the above

Question 22

Which of the following is NOT a guarantee of Ginnie Mae GNMA)?

A) Timely payments of principal and interest
B) Settling accounts with servicer
C) All mortgages would be paid off at maturity
D) Upon default they will repay outstanding loan balance

Question 23

The primary purpose of Freddie Mac FHLMC) is to:

A) Provide a secondary market for mortgage originators
B) Provide investors with a guaranteed rate of return
C) Create competition for Fannie Mae and Ginnie Mae
D) Provide consumers with more options when deciding on a mortgage loan

Question 24

Prices of mortgage pass-through securities are:

A) Unaffected by changes in interest rates
B) Related positively to changes in interest rates
C) More sensitive to declines in interest rates and less sensitive to increases in interest rates
D) Less sensitive to declines in interest rates and more sensitive to increases in interest rates

Question 25

The Government National Mortgage Association GNMA) was organized to perform three principal functions. Which of the following is NOT a function of GNMA?

A) Provide special assistance lending in support of federal programs
B) Manage and liquidate mortgages previously acquired by FNMA
C) Manage all secondary mortgage market operations
D) Provide a guarantee for FHA/VA mortgage pools that would provide a guarantee for mortgage backed securities

Question 26

The investment rating for mortgage-backed bonds depends on each of the following EXCEPT:

A) Appraised value and DCR
B) Interest rates in mortgage pool
C) Extent of over collateralization
D) Initial price paid for the security

Question 27

If a mortgage pool consists of five 10% FRMs totaling $500,000, five 9% FRMs totaling $450,000, and ten 8% FRMs totaling $750,000, what is the weighted average coupon WAC) rate?

A) 8.75%
B) 8.85%
C) 9.00%
D) None of the above

Question 28

Which of the following statements regarding mortgage-backed bonds is generally TRUE?

A) The total value of the MBBs issued usually equals the value of the mortgages in the underlying pool
B) Unlike corporate bonds, MBBs usually are issued with variable coupon rates of interest
C) Overcollateralization of the mortgage pool assures investors that the income from mortgage will be sufficient to pay the interest on bonds and the principal upon maturity
D) All of the above

Question 29

Which of the following is FALSE regarding mortgage-backed bonds MBBs):

A) Their issuer retains ownership of mortgages
B) Their maturity is indefinite at issuance
C) They are issued with fixed coupon rates
D) They are usually underwritten by investment banking companies

Question 30

When evaluating an investment in a mortgage pass-through security, which of the following is NOT one of the characteristics of the underlying mortgage pool that should be considered?

A) The amount of overcollateralization of the mortgage pool
B) The geographic distribution of the mortgages
C) The amount of seasoned mortgages included in the pool
D) None of the above should be considered.

Question 31

The pass-through rate is the coupon rate of interest promised by the issuer of a pass-through security to the investor. In most instances, the pass-through rate is:

A) Equal to the average rate of interest on all mortgages in the underlying pool
B) Lower than the lowest rate of interest on any mortgage in the underlying mortgage pool
C) Higher than the highest rate of interest on any mortgage in the underlying mortgage pool
D) None of the above

Question 32

Ceteris paribus, the more seasoned a mortgage is:

A) The greater the likelihood of prepayment
B) The greater the likelihood of default
C) The greater the likelihood that the mortgage will be carried to maturity
D) All of the above

Question 33

When pricing mortgage pass-through securities, issuers use each of the following methods to include prepayment assumptions EXCEPT:

A) FHA prepayment experiences
B) The pool factor technique
C) The PSA model
D) Constant rates of prepayment

Question 34

Which of the following is NOT a risk listed for mortgage-backed securities?

A) Default risk
B) Delayed payment risk
C) Pass-through risk
D) Interest rate risk