Deck 7: Mortgage Markets

Question 1

A borrower took out a 30-year fixed-rate mortgage of $2,250,000 at a 7.2% annual rate. After five years, he wishes to pay off the remaining balance. Interest rates have by then fallen to 7%. How much must he pay to retire the mortgage (to the nearest dollar)?

A) $2,122,426
B) $2,225,330
C) $2,015,678
D) $2,212,041
E) $1,999,998 $2,250,000 = Pmt * PVIFA (0.072/12, 360 months); Pmt = $15,272.73; New Balance = $15,272.73 * PVIFA (0.072/12, 300 months) = 2,122,425.62

Answer 1

$2,122,426

Question 2

The largest category of mortgages by dollar volume is commercial mortgages.

Answer 2

False

Question 3

You obtain a $265,000, 15-year fixed-rate mortgage. The annual interest rate is 6.25%. In addition to the principle and interest paid, you must pay $275 a month into an escrow account for insurance and taxes. What is the total monthly payment (to the nearest dollar)?

A) $2,272
B) $1,632
C) $2,547
D) $1,907
E) $2,311 265,000 = [Pmt * PVIFA (0.0625/12, 180 months)] + 275 = 2,547

Answer 3

$2,547

Question 4

Mortgage payments are ____________ on a 15-year fixed-rate mortgage than on a 30-year fixed-rate mortgage, and ____________ is paid on a 15-year mortgage than on a 30-year mortgage; ceteris paribus.

A) lower; less interest
B) lower; less principle
C) higher; less interest
D) higher; more principle
E) higher; more interest

Question 5

Private mortgage insurance (and hence, that part of the homeowner's monthly payment) is automatically removed from a mortgage when the loan-to-value ratio on the mortgage falls below 80%.

Question 6

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

Question 7

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

Question 8

You purchase a $325,000 town home and you pay 25% down. You obtain a 30-year fixed-rate mortgage with an annual interest rate of 5.75%. After 5 years you refinance the mortgage for 25 years at a 5.1% annual interest rate. After you refinance, what is the new monthly payment (to the nearest dollar)?

A) $1,422
B) $1,401
C) $1,366
D) $1,335
E) $1,296 0.75 * $325,000 = Pmt * PVIFA (0.0575/12, 360 months); Balance after 5 years = 226,107.8; New Pmt = 226,107.8/PVIFA (0.051/12,300) = 1,335.01

Question 9

A ___________ placed against mortgaged property ensures that the property cannot be sold (except by the lender) until the mortgage is paid off.

A) collateral
B) lien
C) writ of habeas corpus
D) down payment
E) writ of certiorari

Question 10

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

A) collateralization
B) securitization
C) market capitalization
D) stock diversification
E) mortgage globalization

Question 11

The schedule showing how monthly mortgage payments are split into principle and interest is called a(n)

A) securitization schedule
B) balloon payment schedule
C) graduated payment schedule
D) amortization schedule
E) growing equity schedule

Question 12

Federally insured mortgages are called conventional mortgages.

Question 13

Discount points are paid to reduce the down payment required.

Question 14

Rank the following types of mortgages by amount outstanding from largest to smallest.
I) Home mortgages
II) Multifamily mortgages
III) Farm mortgages
IV) Commercial mortgages

A) I, II, III, IV
B) I, II, IV, III
C) II, I, IV, III
D) IV, II, III, I
E) I, IV, II, III

Question 15

A homebuyer bought a house for $245,000. The buyer paid 20% down but decided to finance closing costs of 3% of the mortgage amount. If the borrower took out a 30-year fixed-rate mortgage at a 5% annual interest rate, how much interest will the borrower pay over the life of the mortgage?

A) $224,655
B) $180,622
C) $228,477
D) $188,265
E) $248,575 0.80 * 245,000 * 1.03 = Pmt *PVIFA (0.05/12, 360 months); Pmt = 1,083.74; Total interest = (360 * 1,083.74) - (0.80 * 245,000 * 1.03) = 188,265

Question 16

A borrower using a conventional mortgage will have to put up at least a 20% down payment or purchase private mortgage insurance.

Question 17

With a fixed-rate mortgage, the ____________ bears the interest rate risk and with an ARM the ______________ bears the interest rate risk.

A) borrower; lender
B) borrower; borrower
C) lender; lender
D) lender; borrower
E) federal government; pool organizer

Question 18

The process of mortgage securitization results in a separation between mortgage origination and mortgage financing.

Question 19

You purchase a $255,000 house and you pay 20% down. You obtain a fixed-rate mortgage where the annual interest rate is 5.85% and there are 360 monthly payments. What is the monthly payment?

A) $1,215.27
B) $1,203.48
C) $1,194.45
D) $1,367.22
E) $1,504.35 0.80*$255,000 = Pmt *PVIFA (0.0585/12, 360 months); Pmt = 1,203.48

Question 20

If a borrower makes a 20% down payment on a conventional mortgage they will be required to obtain

A) FHA insurance
B) VA insurance
C) private mortgage insurance
D) GNMA payment guarantees
E) none of the above

Question 21

Construct an amortization schedule for the first three months and the final three months of payments for a 30-year, 7% mortgage in the amount of $90,000. What percentage of the third payment is principle? What percentage of the final payment is principle? What do these differences imply? (Hint: The balance after the 357^th payment is $1,775.56.)

Question 22

How long must the owner stay in the house to make it worthwhile to pay the points if the payment saving is invested monthly?

A) 7.15 years
B) 3.33 years
C) 6.04 years
D) 5.90 years
E) More than 30 years $5,625 points cost = $79.40 payment savings*PVIFA (0.055/12, N); N = 85.85 months/12 = 7.15 years
Refer To: 07-22

Question 23

A(n) ___________________ is used to help retired people receive monthly income in exchange for the equity in their home.

A) SAM
B) Equity Participation Mortgage
C) RAM
D) PLAM
E) GEM

Question 24

If you will keep the mortgage for 30 years, what is the net present value of paying the points (to the nearest dollar)?

A) $9,475
B) $8,360
C) $7,564
D) $7,222
E) $6,578 No Points: Pmt = $250,000/PVIFA (0.06/12, 360 months); Pmt = 1,498.88; Pay Points: Pmt = $250,000/PVIFA (0.055/12, 360 months); Pmt = 1,419.47; Pmt savings = 1,498.88 - 1,419.47 = 79.40; NPV of points: [79.40 *PVIFA (0.055/12, 360 months)] - (0.0225 *250,000) = 8,360

Question 25

Which of the following statements about mortgage markets is/are true?
I) Mortgage companies service more mortgages than they originate.
II) Servicing fees typically range from 2% to 4%.
III) Most mortgage sales are with recourse.
IV) The government is involved in the residential mortgage markets.

A) I, III, and IV only
B) II, III, and IV only
C) I, II, and IV only
D) II and III only
E) I and IV only

Question 26

The FHA charges the homeowner __________________ to insure an FHA mortgage.

A) nothing
B) 0.5% of the loan amount
C) $500
D) 1% of the loan amount
E) $1,500

Question 27

Which one of the following entities is an actual government agency dealing with mortgages?

A) GNMA
B) FNMA
C) FHLMC
D) PIP
E) CMO

Question 28

A $25,000 face value GNMA pass-through quote sheet lists a spread to average life of 103, PSA of 220, and a price of 101-09. This means that
I) the pass-through yield is 103 basis points above the comparable maturity Treasury bond.
II) the pass-through is being prepaid more quickly than standard PSA.
III) the pass-through is priced at $25,272.50.

A) I, II, and III are correct
B) I and II only
C) I and III only
D) II and III only
E) III only

Question 29

Why do mortgage lenders prefer ARMs while many borrowers prefer fixed-rate mortgages, ceteris paribus.

Question 30

You want to buy a $250,000 house and you will use a conventional mortgage. What is the minimum down payment you have to make to avoid having to purchase mortgage insurance?

A) $10,000
B) $20,000
C) $30,000
D) $40,000
E) $50,000

Question 31

One fixed-rate mortgage pool has a 750 PSA and a second fixed-rate pool has 150 PSA. The pool with the higher PSA ______________________ than the pool with the lower PSA.
I) probably has a higher coupon
II) probably has lower default risk
III) will mature more quickly

A) I, II, and III
B) I and II only
C) II and III only
D) I and III only
E) I only

Question 32

The least used form of mortgage securitization is the ______________________.

A) second mortgage
B) mortgage-backed bond
C) mortgage pass-through
D) CMO
E) home equity loan

Question 33

How long must the owner stay in the house to make it worthwhile to pay the points if the payment saving is not invested?

A) 7.15 years
B) 3.33 years
C) 6.04 years
D) 5.90 years
E) More than 30 years $5,625 points cost/79.40 payment savings = N = 70.84 months/12 = 5.90 years
Refer To: 07-22

Question 34

A homeowner could take out a 15-year mortgage at a 5.5% annual rate on a $195,000 mortgage amount, or she could finance the purchase with a 30-year mortgage at a 6.1% annual rate. How much total interest over the entire mortgage period could she save by financing her home with the 15-year mortgage (to the nearest dollar)?

A) $230,408
B) $190,105
C) $155,612
D) $144,325
E) $138,612 195,000 = Pmt *PVIFA (0.055/12, 180 months); Pmt of 1,593.31 *180 = 91,796; 195,000 = Pmt *PVIFA (0.061/12, 360 months); Pmt of 1,181.69 *360 = 230,408; 230,408 - 91,796 = 138,612

Question 35

If mortgage rates are 6.25% for a 30-year fixed-rate mortgage, how large can his mortgage be?

Question 36

Which of the following statements about GNMA is/are true?
I) GNMA provides timing insurance.
II) GNMA creates pools of mortgages and issues securities.
III) GNMA insures only FHA, VA, and FmHA loans.
IV) GNMA requires that all mortgages in the pool have the same interest rate.

A) I, II, III, and IV are true
B) I, III, and IV only
C) I, II, and III only
D) II, III, and IV only
E) III and IV only

Question 37

Mortgage fees paid by the homeowner at, or prior to, closing upon the purchase of a house typically include all but which one of the following?

A) Application fee
B) Title search fee
C) Title insurance fee
D) Appraisal fee
E) Prepayment penalty

Question 38

As compared to fixed-rate mortgages, ARMs result in which of the following for the lender?
I) Higher interest rate risk
II) Lower default risk
III) Greater prepayment penalty fees

A) I, II, and III
B) I and II only
C) II and III only
D) I and III only
E) None of the above

Question 39

An MBB differs from a CMO or a pass-through in that
I) the MBB does not result in the removal of mortgages from the balance sheet.
II) a MBB holder has no prepayment risk.
III) cash flows on a MBB are not directly passed through from mortgages.

A) I, II, and III
B) I and II only
C) II and III only
D) I and III only
E) I only

Question 40

Which one of the following types of mortgages is likely to become more popular as the average age of the U.S. population increases?

A) GEM
B) GPM
C) SAM
D) PLA
E) RAM

Question 41

Why have FNMA and Freddie Mac, considered government sponsored enterprises (GSEs), been in the news lately? Explain.

Question 42

Why were CMOs created?

Question 43

Explain each term of the following pass-through quote:

Question 44

How does GNMA improve mortgage marketability?

Question 45

You bought your house 5 years ago and you believe you will be in the house only about 5 more years before it gets too small for your family. Your original home value when you bought it was $250,000, you paid 20% down and you financed closing costs equal to 3% of the mortgage amount. The mortgage was a 30 year fixed-rate mortgage with a 6.5% annual interest rate. Rates on 30-year mortgages are now at 5% if you pay 2 points. Your refinancing costs will be 1.5% of the new mortgage amount (excluding points). You won't finance the points and closing costs this time. A new down payment is not required. Should you refinance? Ignore all taxes and show your work.

Question 46

Who are the major buyers of mortgages after they have been originated? What is the difference between selling with recourse or without recourse? Which is most common?

Question 47

If his parents give him $20,000 for a down payment, what is the most he can pay on a house with a 15-year mortgage if the interest rate is 5.50%?