Deck 26: The Market for Residential Mortgage-Backed Securities

Question 1

The driving force in the development of a strong secondary market for residential mortgage loans was a financial innovation, which involves:

A) The pooling of mortgages.
B) The issuance of securities collateralized by these mortgages.
C) Asset securitization.
D) A and b only.
E) All of the above.

Answer 1

All of the above.

Question 2

Asset securitization calls for a financial intermediary to:

A) Originate a loan.
B) Retain the loan in its portfolio of assets.
C) Service the loan.
D) Obtain funds from the public to finance its assets.
E) All of the above.

Answer 2

All of the above.

Question 3

With asset securitization more than one institution may be involved so that a thrift or bank does not have to:

A) Absorb the credit risk.
B) Service the mortgage.
C) Provide the funding.
D) b and c only.
E) All of the above.

Answer 3

All of the above.

Question 4

In response to the Great Depression and its effects on financial markets, the Federal Reserve provided liquidity for thrifts by the creation of the:

A) Federal Home Loan Banks.
B) Federal Housing Administration.
C) Fannie Mae.
D) Ginnie Mae.
E) Freddie Mac.

Question 5

The agency charged with the responsibility to create a liquid secondary market for FHA- and VA-insured mortgages is:

A) Ginnie Mae.
B) Fannie Mae.
C) Freddie Mac.
D) FHLB.
E) None of the above.

Question 6

Fannie Mae, Ginnie Mae, and Freddie Mac helped to create a secondary market for mortgages by:

A) Issuing conventional mortgage loans.
B) Purchasing conventional mortgage loans.
C) Issuing FHA- and VA-insured mortgage loans.
D) Providing mortgage insurance.
E) None of the above.

Question 7

Freddie Mac and Fannie Mae created mortgage pass-through securities by:

A) Purchasing mortgages.
B) Pooling these mortgages.
C) Issuing securities using the pool of mortgages as collateral.
D) b and c only.
E) All of the above.

Question 8

When a mortgage is included in a pool of mortgages that is used as collateral for a mortgage pass-through security, the mortgage is said to be:

A) Securitized.
B) Collateralized.
C) Guaranteed.
D) Standardized.
E) Stripped.

Question 9

The cash flows of a mortgage pass-through security consist of:

A) Interest payments.
B) Repayment of principal.
C) Any prepayments.
D) a and b only.
E) All of the above.

Question 10

The pass-through securities issued by Ginnie Mae, Freddie Mac, and Fannie Mae:

A) Are guaranteed by these agencies.
B) Increase the supply of capital to the residential mortgage market.
C) Provide support for an active secondary market.
D) b and c only.
E) All of the above.

Question 11

The security issued by Freddie Mac is called a:

A) Participation certificate.
B) Mortgage-backed security.
C) Non-agency mortgage pass-through security.
D) Stripped mortgage-backed security.
E) None of the above.

Question 12

Non-agency mortgage pass-through securities are supported by credit enhancements such as:

A) Corporate guarantees.
B) Pool insurance from a mortgage insurance company.
C) A bank letter of credit.
D) Senior/subordinated interests.
E) All of the above.

Question 13

Prepayment risk, which is associated with the risk of prepayments, consists of:

A) Default risk.
B) Contraction risk.
C) Extension risk.
D) b and c only.
E) All of the above.

Question 14

A collateralized mortgage obligation (CMO):

A) Cannot eliminate prepayment risk.
B) Redistributes the cash flows of pools of mortgage pass-through securities to different bond classes.
C) Distributes the various forms of prepayment risk among different classes of bondholders.
D) b and c only.
E) All of the above.

Question 15

A CMO is structured with various bond classes referred to as:

A) Serial bonds.
B) Tranches.
C) Class.
D) Series.
E) None of the above.

Question 16

The risk resulting from a decline in mortgage rates that will shorten the life of a mortgage is called:

A) Prepayment risk.
B) Contraction risk.
C) Extension risk.
D) Price risk.
E) None of the above.

Question 17

Computing a yield for a mortgage-backed security is difficulty because:

A) It requires a determination of the cash flow.
B) The cash flow is uncertain because of prepayments.
C) Assumptions about prepayments must be made.
D) All of the above.
E) None of the above.

Question 18

Commercial mortgage-backed securities:

A) Are issued by private entities.
B) Do not have any implicit or explicit government guarantee.
C) Must be credit enhanced.
D) Are backed by a pool of commercial mortgage loans.
E) All of the above.

Question 19

A stripped mortgage-backed security is a type of derivative mortgage-backed security.

Question 20

The cash flow of a mortgage pass-through security depends on the cash flows of the underlying mortgages.

Question 21

Mortgage loans that are greater than the maximum permissible loan size are referred to as nonconforming loans.

Question 22

Prepayment risk makes pass-throughs unattractive for certain financial institutions to hold from an asset/liability perspective.

Question 23

Discuss the development of the current mortgage market.

Question 24

Describe the risks an investor in mortgage pass-throughs is exposed to.

Question 25

Compare and contrast mortgage-backed securities and commercial mortgage-backed securities.