Deck 9: Mortgage Markets

Question 1

Mortgage-backed securities are commonly contained within collateralized debt obligations.

Answer 1

True

Question 2

A financial institution has a higher degree of interest rate risk on a ____ than a ____.

A)30-year fixed-rate mortgage; 15-year fixed-rate mortgage
B)30-year variable-rate mortgage; 30-year fixed-rate mortgage
C)15-year fixed-rate mortgage; 30-year fixed-rate mortgage
D)15-year variable-rate mortgage; 15-year fixed-rate mortgage

Answer 2

A

Question 3

Caps on mortgage rate fluctuations with adjustable-rate mortgages (ARMs) are typically

A)2 percent per year and 5 percent for the mortgage lifetime.
B)5 percent per year and 15 percent for the mortgage lifetime.
C)0 percent per year and 10 percent for the mortgage lifetime.
D)3 percent per year and 8 percent for the mortgage lifetime.

Answer 3

A

Question 4

The interest rate on a second mortgage is ____ on a first mortgage created at the same time, because the second mortgage is ____ the existing first mortgage in priority claim against the property in the event of default.

A)higher than; behind
B)equal to that; equal to
C)lower than; ahead of
D)higher than; ahead of
E)lower than; behind

Question 5

At a given point in time, the interest rate offered on a new fixed-rate mortgage is typically ____ the initial interest rate offered on a new adjustable-rate mortgage.

A)below
B)above
C)equal to
D)all of the above are very common

Question 6

Mortgage companies specialize in

A)purchasing mortgages originated by other financial institutions.
B)investing and maintaining mortgages that they create.
C)originating mortgages and selling those mortgages.
D)borrowing money through the creation of mortgages that is used to invest in real estate.

Question 7

A mortgage with low initial payments that increase over time without ever leveling off is a

A)graduated payment mortgage.
B)growing-equity mortgage.
C)second mortgage.
D)shared-appreciation mortgage.

Question 8

A mortgage which requires interest payments for a three- to five-year period, then full payment of principal, is a(n)

A)chattel mortgage.
B)balloon payment mortgage.
C)variable-rate mortgage.
D)open-ended mortgage bond.

Question 9

Which of the following mortgages allows the home purchaser to obtain a mortgage at a below-market interest rate throughout the life of the mortgage?

A)second mortgage
B)growing-equity mortgage
C)graduated payment mortgage
D)shared-appreciation mortgage

Question 10

In an amortization schedule of monthly mortgage payments

A)the amount of interest in each payment is equal to the principal paid.
B)interest payments exceed principal payments early on.
C)principal payments exceed interest payments early on.
D)B and C both occur with about equal frequency

Question 11

A balloon-payment mortgage requires interest payments for a 10- to 20-year period, at the end of which the borrower must pay the full amount of the principal.

Question 12

Use an amortization schedule.A 15-year $100,000 mortgage has a fixed mortgage rate of 9 percent.In the first month, the total mortgage payment is $____, and $____ of this amount represents payment of interest.

A)1,014; 264
B)1,241; 750
C)1,014; 750
D)none of the above

Question 13

Rates for adjustable-rate mortgages are commonly tied to the

A)average prime rate over the previous year.
B)Fed's discount rate over the previous year.
C)average Treasury bill rate over the previous year.
D)average Treasury bond rate over the previous year.

Question 14

From the perspective of the lending financial institution, interest rate risk is lower

A)lower on a 30-year fixed-rate mortgage than on a 15-year fixed-rate mortgage.
B)lower on a 15-year fixed-rate mortgage than on a 30-year fixed-rate mortgage.
C)higher on a 15-year fixed-rate mortgage than on a 30-year fixed-rate mortgage.
D)higher on a 15-year adjustable-rate mortgage than on a 30-year adjustable-rate mortgage.

Question 15

A ____ mortgage allows the borrower to initially make small payments on the mortgage.The payments then increase over the first 5 to 10 years and then level off.

A)graduated payment mortgage
B)growing-equity mortgage
C)second mortgage
D)shared-appreciation mortgage

Question 16

For any given interest rate, the shorter the life of the mortgage, the ____ the monthly payment and the ____ the total payments over the life of the mortgage.

A)greater; greater
B)greater; less
C)less; greater
D)less; less

Question 17

Mortgage companies, commercial banks and savings institutions are the primary originators of mortgages.

Question 18

____ was created in 1968 as a corporation that is wholly owned by the federal government.It supplies funds to low- and moderate-income homeowners indirectly by facilitating the flow of funds into secondary mortgage markets.

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

Question 19

An institution that originates and holds a fixed-rate mortgage is adversely affected by ____ interest rates; the borrower who was provided the mortgage is adversely affected by ____ interest rates.

A)stable; decreasing
B)increasing; stable
C)increasing; decreasing
D)decreasing; increasing

Question 20

Federally insured mortgages guarantee

A)loan repayment to the lending financial institution.
B)that the interest rate will not increase during the life of the mortgage.
C)the lending financial institution a selling price for the mortgage in the secondary market.
D)all of the above

Question 21

____ economic growth will probably ____ the risk premium on mortgages and ____ the price of mortgages.

A)Strong; increase; decrease
B)Strong; increase; increase
C)Weak; decrease; increase
D)Weak; increase; increase
E)Weak; decrease; decrease

Question 22

Fannie Mae and Freddie Mac experienced financial problems during the credit crisis because they:

A)were unwilling to finance new mortgages.
B)invested heavily in balloon mortgages.
C)invested only in prime mortgages that offered very low returns.
D)invested heavily in subprime mortgages.

Question 23

Which of the following is not a common type of mortgage pass-through securities according to your text?

A)participation certificates (PCs)
B)collateralized mortgage obligations (CMOs)
C)balloon-payment mortgage
D)publicly issued pass-through securities (PIPs)
E)all of the above are common types of mortgage pass-through securities

Question 24

The adjustable-rate mortgage creates uncertainty for the ____ profit margin, but reduces the uncertainty for the ____.

A)originator's; borrower
B)borrower's; originator
C)government's; originator
D)none of the above

Question 25

Collateralized mortgage obligations (CMOs) are generally perceived to have

A)no interest rate risk but some default risk.
B)the same interest rate risk and no default risk.
C)the same interest rate risk as money market securities.
D)a high degree of interest rate risk.

Question 26

____ risk is the risk that a borrower may prepay the mortgage in response to a decline in interest rates.

A)Interest rate
B)Credit
C)Prepayment
D)Reinvestment rate

Question 27

Mortgages are packaged, but segmented into ____ (or classes) before mortgage-backed securities are issued.

A)balloon payments
B)caps
C)tranches
D)strips

Question 28

Mortgage prices would normally be expected to ____ when the budget deficit ____, holding other factors constant.

A)increase; increases
B)decrease; decreases
C)increase; decreases
D)none of the above

Question 29

Mortgage-backed securities are assigned ratings by:

A)rating agencies.
B)the Treasury.
C)the Fed.
D)the mortgage originator.

Question 30

When financial institutions originate residential mortgages, the mortgage contract should probably not specify

A)whether the mortgage is federally insured.
B)the amount of the loan.
C)whether the interest rate is fixed or adjustable.
D)the maturity.
E)the mortgage contract should specify all of the above

Question 31

During a weak economy, the credit risk to a financial institution from investing in mortgage-backed securities representing subprime mortgages is ____ than that of mortgage-backed securities representing prime mortgages.

A)equal to
B)slightly less than
C)more than
D)substantially less than

Question 32

The difference between the 30-year mortgages rate and the 30-year Treasury bond rate is primarily attributable to

A)interest rate risk.
B)reinvestment rate risk.
C)credit risk.
D)insurance risk.

Question 33

Which of the following is not a guarantor of federally insured mortgages?

A)the Federal Housing Administration (FHA)
B)the Veteran's Administration (VA)
C)the U.S.Treasury
D)all of the above are guarantors of federally insured mortgages

Question 34

A financial institution may service a mortgage even after selling it.

Question 35

A ____ mortgage allows borrowers to initially make small payments on the mortgage, which are then increased on a graduated basis over the first five to ten years; payments then level off from there on.

A)balloon-payment
B)graduated-payment
C)shared-appreciation
D)growing-equity
E)none of the above

Question 36

"Securitization" refers to the private insurance of conventional mortgages.

Question 37

The credit crisis is mostly attributed to the use of:

A)excessively strict criteria applied by mortgage originators.
B)excessively liberal criteria applied by mortgage originators.
C)very tough credit ratings applied to mortgages.
D)fixed-rate mortgages with excessively long terms to maturity.

Question 38

Which pass-through security is backed by mortgages that are insured through private insurance companies?

A)Ginnie Mae mortgage-backed securities
B)Fannie Mae mortgage-backed securities
C)publicly issued pass-through securities (PIPs)
D)shared appreciation pass-through securities

Question 39

Mortgage-backed securities are subject to

A)interest rate risk.
B)credit risk.
C)prepayment risk.
D)all of the above.

Question 40

____ mortgages enabled more people with relatively lower income, or high existing debt, or a small down payment to purchase homes.

A)Prime
B)Balloon
C)Amortized
D)Subprime

Question 41

Mortgage lenders normally charge a higher initial interest rate on adjustable-rate mortgages than on fixed-rate mortgages.

Question 42

The higher the level of equity invested by the borrower, the higher the probability that the loan will default.

Question 43

Regardless of what happens to market interest rates, most adjustable-rate mortgages (ARMs) specify a maximum allowable fluctuation in the mortgage rate per year and over the mortgage life.

Question 44

____ economic growth will probably ____ the risk premium on mortgages and ____ the price of mortgages.

A)Strong; decrease; decrease
B)Strong; increase; increase
C)Weak; increase; increase
D)Weak; decrease; increase
E)Weak; decrease; decrease

Question 45

Since mortgages are rarely sold in the secondary market, they are valued by institutional investors only at maturity.

Question 46

From the perspective of the lending financial institution, there is a ____ degree of interest rate risk for ____-maturity mortgages.

A)higher; shorter
B)higher; longer
C)lower; shorter
D)lower; higher
E)Answers B and C are correct.

Question 47

Borrowers who have a lower level of income relative to the periodic loan payments are more likely to default on their mortgages.

Question 48

During the early years of a mortgage, most of the monthly payment reflects principal.

Question 49

During the early years of a mortgage,

A)most of the monthly payment reflects principal reduction.
B)most of the monthly payment reflects interest.
C)about half of the monthly payment reflects interest.
D)Cannot answer without more information.

Question 50

The probability that a borrower will default (credit risk) is influenced by all of the following, except

A)economic conditions.
B)the level of equity invested by the borrower.
C)the borrower's income level.
D)the borrower's credit history.
E)Credit risk is affected by all of the above.

Question 51

Strong economic growth tends to reduce the probability that the issuer of a mortgage will default on its debt payments and therefore tends to decrease mortgage prices.

Question 52

A balloon-payment mortgage requires interest payments for a three- to five-year period.At the end of this period, full payment of the principal (the balloon payment) is required.

Question 53

Some adjustable-rate mortgages (ARMs) contain an option clause that allows mortgage holders to switch to a fixed-rate mortgage within a specified period.

Question 54

Which of the following is not mentioned in your text as a creative mortgage financing method?

A)graduated-payment mortgage (GPM)
B)growing-equity mortgage
C)balloon-payment mortgage
D)shared-appreciation mortgage

Question 55

Financial institutions that hold fixed-rate mortgages in their asset portfolios are exposed to ____ risk, because they commonly use funds obtained from short-term customer deposits to make long-term mortgage loans.

A)exchange rate
B)prepayment
C)reinvestment rate
D)interest rate
E)exchange rate

Question 56

There is a secondary mortgage market that accommodates originators of mortgages who desire to sell their mortgages at maturity.

Question 57

A ____ market accommodates originators of mortgages that desire to sell their mortgages prior to maturity.

A)primary
B)secondary
C)money
D)none of the above

Question 58

Non-U.S.financial institutions never hold mortgages on U.S.property.

Question 59

An increase in either the risk-free rate or the risk premium on a fixed-rate mortgage results in a higher required rate of return when investing in the mortgage and therefore causes mortgage prices to decrease.

Question 60

Which of the following is not true with respect to a growing-equity mortgage?

A)It is similar to a graduated-payment mortgage.
B)It allows borrowers to initially make small payments on the mortgage.
C)It involves increased payments, on a graduated basis, over the first five to ten years of the mortgage.
D)It involves payments that level off after the first five to ten years of the mortgage.
E)All of the above are true regarding a growing-equity mortgage.