Exam 9: Mortgage Markets and Mortgagebacked Securities

Mortgage pool securities have encouraged individuals, insurance companies, and pensionfunds to provide indirect mortgage financing.

Explain the ways in which the federal government fostered the development of the secondary mortgage markets.

What is a subprime mortgage? What makes a mortgage 'subprime?' How were these mortgages involved in the 2007-2008 financial crisis?

Most mortgage loans are amortized over the maturity of the loan with interest computed on the declining principal.

The CPR on a mortgage pool refers to the expected default rate per year on mortgages in the pool.

To avoid taxation a pool organizer will structure a CMO as a REMIC. 29 When interest rates fall investors in a mortgage pass-through security will likely receive greater cash flows than expected.

The major regulator for the GNMA (Ginnie Mae), FNMA (Fannie Mae), and Federal Home Loan Banks is the Federal Housing Finance Agency.

An ARM, compared to a FRM, shifts the interest rate risk from the borrower to the lender.

When might an IO mortgage-backed security exhibit a price increase when interest rates increase?

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

Like corporate and municipal bonds, mortgages are issued in standard denominations.

FHMLC buys only FHA/VA insured mortgages from loan originators.

Why is a PO mortgage-backed security more price volatile than a standard non-callable bond?

Pass-through mortgage securities have standard denominations but uncertain cash flow.

CMO residual tranches have the first claim on the cash flow from a pool of mortgages.

In a conventional mortgage agreement the borrower owns the mortgaged home; the lender takes a lien against the home.

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