Exam 9: Mortgage Markets and Mortgagebacked Securities

Unlike mortgage-backed securities, individual mortgages are issued in standard denominations.

Mortgage insurance was an important factor in the development of secondary mortgage markets.

Pass-through securities pass through all principal and interest payments collected from homeowners, providing a fixed stream of cash flow to the investor.

Mortgage-backed securities are more liquid than individual mortgages.

Home equity credit lines are a form of second mortgage financing.

Investors in CMO securities are not exposed to prepayment risk.

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

In July 2006, Forrest purchased a town house at $325,000 and paid 25% down. The mortgage that he obtained is a 30-year fixed-rate with an annual percentage interest rate of 5.75%. In July 2011, due to a fall in interest rates, he decided to refinance and obtained a mortgage at a 5.1% annual interest rate for 25 years. After he refinanced, how much is the payment reduced assuming that all payments were made on time?

Lifetime interest rate caps limit the size of the increase in the loan rate over the loan's life.

Since the financial crisis the Federal National Mortgage Association (FNMA) has been a privately owned corporation with a line of credit from the U.S. Treasury.

Mortgage originators may retain the servicing right and fees even though the mortgage has been sold.

Since 2008 the fastest growth in mortgage holdings has been by the federal government.

List three ways in which a change in the rate of an adjustable-rate mortgage can affect the borrower's mortgage.

A lender with a fixed-rate mortgage bears the risk of future inflation.

When might an investor prefer an agency backed sequential pay CMO to a standard mortgage pass-through security backed by insured mortgages?

REMIC securities are a form of collateralized mortgage obligations that provide tax-free income to an investor.

Mortgages may now be originated, funded, serviced, and insured by different parties. What developments are associated with this unbundling of loan cash flows in recent years?

Commercial banks and thrifts are the largest private institutional investor in mortgages.

Why do mortgage-backed securities guaranteed by Federal government agencies often have yields above U.S. Treasury bond rates?

FNMA and FHLMC securitize mortgages but do not provide any final financing of mortgages.