Question 1

The average shape of the yield curve over long periods of time suggests that&#10;A) The average interest cost of an ARM will be lower than for an FRM&#10;B) The average cost of an FRM will be lower than an ARM&#10;C) The cost of an FRM and ARM will average out to be the same&#10;D) Prepayments will be faster under an ARM

Accepted Answer

The average shape of the yield curve, which typically slopes upwards, suggests that short-term interest rates are usually lower than long-term rates. This implies that the average interest cost of an Adjustable-Rate Mortgage (ARM), which adjusts based on short-term rates, will generally be lower than for a Fixed-Rate Mortgage (FRM) over long periods.

Question 2

&#34;Teaser&#34; rates are often offered on&#10;A) FRMs&#10;B) ARMs&#10;C) Commercial mortgages&#10;D) Unsecured loans

Accepted Answer

"Teaser" rates are typically offered on Adjustable Rate Mortgages (ARMs), where an initially lower interest rate is provided for a short period before adjusting to market rates.

Question 3

A conforming mortgage&#10;A) Is the same as an ARM&#10;B) Is the same as an FRM&#10;C) Meets the Fannie Mae or Freddie Mac criteria for being included in one of their mortgage pools&#10;D) Is held to maturity by the originator

Accepted Answer

A conforming mortgage meets the criteria set by Fannie Mae or Freddie Mac to be eligible for purchase by these government-sponsored enterprises, which includes specific loan limits, borrower credit requirements, and down payment criteria.

Question 4

By paying points, a home buyer&#10;A) Is quoted a lower interest rate&#10;B) Gets less cash from the lender at closing&#10;C) Is able to improve the borrower's credit score&#10;D) Both a and b

Accepted Answer

Paying points typically results in a lower interest rate and does not affect the cash from the lender at closing, nor does it improve the borrower's credit score.

Question 5

Second mortgages&#10;A) Have shorter maturities than first mortgages&#10;B) Have higher interest rates than first mortgages&#10;C) Have a lower claim than first mortgages&#10;D) All of the above

Accepted Answer

Second mortgages typically have shorter maturities, higher interest rates, and a lower claim on the property compared to first mortgages. This is because they are considered riskier by lenders, as they are second in line to be repaid in case of default.

Question 6

With a fixed-payment amortized loan&#10;A) The amount of payment going toward principal stays the same over the life of the mortgage&#10;B) The amount of payment going to interest increases while the amount going to principal declines over the life of the mortgage&#10;C) The amount of payment going to interest decreases while the amount going to principal increases over the life of the mortgage&#10;D) All the payments go toward interest over the life of the mortgage

Accepted Answer

In a fixed-payment amortized loan, the total payment amount remains the same throughout the term, but the portion of each payment that goes toward interest decreases over time, while the portion that goes toward the principal increases. This is because as the principal balance decreases, the interest calculated on the remaining balance also decreases, allowing more of the payment to be applied to the principal.

Question 7

The prepayment option in a home mortgage&#10;A) Raises the mortgage rate to the borrower&#10;B) Does not affect the mortgage rate&#10;C) Lowers the mortgage rate&#10;D) Is no longer important

Accepted Answer

The answer of The prepayment option in a home mortgage&#10;A)...

Question 8

Which of the following features act to lower mortgage rates?&#10;A) Escrow accounts&#10;B) Monthly mortgage payments (as opposed to less frequent payments)&#10;C) Qualifying for conforming mortgage status&#10;D) All of the above

Accepted Answer

All of the listed features can contribute to lowering mortgage rates in various ways. Escrow accounts ensure timely payment of taxes and insurance, reducing risk for lenders. Monthly payments improve cash flow for lenders. Conforming mortgage status means the loan meets Fannie Mae and Freddie Mac guidelines, often resulting in lower rates due to the perceived lower risk.

Question 9

Home equity lines of credit (HELOCs)&#10;A) Are typically first mortgages&#10;B) Are typically second mortgages&#10;C) Are not collateralized&#10;D) Are zero-coupon instruments

Accepted Answer

HELOCs are typically second mortgages, allowing homeowners to borrow against the equity in their home, beyond any outstanding first mortgage.

Question 10

Negative convexity&#10;A) Relates to amortization schedules&#10;B) Relates to the linkage between ARM rates and benchmarks&#10;C) Relates to the tendency for mortgage prepayment rates to vary with the level of interest rates&#10;D) Relates to the value of mortgage collateral and prepayments

Accepted Answer

Negative convexity in the context of mortgage-backed securities or similar financial instruments refers to the characteristic where prepayment rates increase as interest rates fall, and decrease as interest rates rise. This is because borrowers are more likely to refinance their mortgages when interest rates are lower.

Question 11

Compared to home mortgages, commercial mortgages&#10;A) Have lower interest rates&#10;B) Have longer maturities&#10;C) Have lower loan-to-value ratios&#10;D) Are not collateralized

Accepted Answer

The answer of Compared to home mortgages, commercial mortgages&#10;A) Have...

Question 12

Residential and nonresidential construction&#10;A) Are not very sensitive to monetary policy actions affecting interest rates&#10;B) Are among the most sensitive spending categories to interest rates&#10;C) Are a small fraction of total investment&#10;D) Do not depend much on credit markets

Accepted Answer

The answer of Residential and nonresidential construction&#10;A) Are not very...

Deck 10: The Mortgage Market