Question 1

Which of the below statements is TRUE?

Accepted Answer

A)  For an fixed-rate mortgage (FRM), as the name implies, the note rate changes over the life of the loan. 
B)  A category of reference rates used in ARMs is the nominal rate. 
C)  The basic ARM is one that resets periodically and has no other terms that affect the monthly mortgage payment. 
D)  An unpopular form of an ARM is the hybrid ARM. 
A)  For an fixed-rate mortgage (FRM), as the name implies, the note rate changes over the life of the loan. 
B)  A category of reference rates used in ARMs is the nominal rate. 
C)  The basic ARM is one that resets periodically and has no other terms that affect the monthly mortgage payment. 
D)  An unpopular form of an ARM is the hybrid ARM.

Question 2

Mortgages are liquid assets because they tend to have a large bid-ask spread.

Accepted Answer

A) True 
 B)False

Question 3

Homeowners seldom repay all or part of their mortgage balance prior to the scheduled maturity date.

Accepted Answer

A) True 
 B)False

Question 4

What is the mission of Freddie Mac and Fannie Mae? What does their federal charter allow for?

Accepted Answer

Freddie Mac and Fannie Mae are GSEs whos

Question 5

Mortgage servicers include bank-related entities, thrift-related entities, and mortgage bankers. There are five sources of revenue from mortgage servicing. Describe two of these five sources.

Accepted Answer

Mortgage servicers include bank-related

Question 6

Is prepayment risk like that faced by a bond investor? Discuss.

Accepted Answer

Prepayment risk is the same as that face

Question 7

Because of prepayments, the investor is uncertain about the cash flows that will be realized from investing in a residential mortgage loan.

Accepted Answer

A) True 
 B)False

Question 8

Prepayment risk is the risk associated with a mortgage's cash flow due to ________. More specifically, investors are concerned that borrowers will pay off a mortgage when prevailing mortgage rates fall ________ the loan's note rate.

Accepted Answer

A)  bankruptcy; below 
B)  prepayments; above 
C)  prepayments; below 
D)  bankruptcy; above 
A)  bankruptcy; below 
B)  prepayments; above 
C)  prepayments; below 
D)  bankruptcy; above

Question 9

To protect against price risk, the originator could get a commitment from the GSE or the private conduit from which the mortgage originator plans to buy the mortgage.

Accepted Answer

A) True 
 B)False

Question 10

Qualifying for a conforming loan is important for both the borrower and the mortgage originator.

Accepted Answer

A) True 
 B)False

Question 11

The principal originators of residential mortgage loans are ________.

Accepted Answer

A)  thrifts, commercial banks, and the government. 
B)  thrifts, commercial banks, and mortgage bankers. 
C)  thrifts, pension funds, and mortgage bankers. 
D)  the secondary market, commercial banks, and mortgage bankers. 
A)  thrifts, commercial banks, and the government. 
B)  thrifts, commercial banks, and mortgage bankers. 
C)  thrifts, pension funds, and mortgage bankers. 
D)  the secondary market, commercial banks, and mortgage bankers.

Question 12

The original mortgage balance (MB₀) is $350,000; and, the number of months of the mortgage loan (n) is 360. What is the monthly mortgage payment (MP) if the initial note rate (i) is 7.50%?

Accepted Answer

A)  $842.15 
B)  $1,447.75 
C)  $2,378.95 
D)  $2,447.25 
A)  $842.15 
B)  $1,447.75 
C)  $2,378.95 
D)  $2,447.25

Question 13

Which of the below statements is FALSE?

Accepted Answer

A)  The mortgage originator cannot hold the mortgage in its investment portfolio. 
B)  Mortgage banking refers to the activity of originating mortgages. 
C)  These mortgage bankers, unlike banks and thrifts, typically do not invest in the mortgages that they originate, but derive their income from the origination fees. 
D)  Someone who wants to borrow funds to purchase a home will apply for a loan from a mortgage originator. 
A)  The mortgage originator cannot hold the mortgage in its investment portfolio. 
B)  Mortgage banking refers to the activity of originating mortgages. 
C)  These mortgage bankers, unlike banks and thrifts, typically do not invest in the mortgages that they originate, but derive their income from the origination fees. 
D)  Someone who wants to borrow funds to purchase a home will apply for a loan from a mortgage originator.

Question 14

There are four main risks associated with investing in mortgages: credit risk, liquidity risk, price risk, and prepayment risk.

Accepted Answer

A) True 
 B)False

Question 15

In regards the risks associated with mortgage origination, price risk is the risk that applicants or those who were issued commitment letters will not close (i.e., complete the transaction by purchasing the property with funds borrowed from the mortgage originator).

Accepted Answer

A) True 
 B)False

Question 16

The ________ is the primary attribute used to characterize loans as either prime or subprime.

Accepted Answer

A)  debit score 
B)  PIT score 
C)  LTV score 
D)  credit score 
A)  debit score 
B)  PIT score 
C)  LTV score 
D)  credit score

Question 17

Pipeline risk refers to what we call market risk and dropdown risk.

Accepted Answer

A) True 
 B)False

Question 18

Which of the below statements is FALSE?

Accepted Answer

A)  If a lender decides to lend the funds, it sends a commitment letter to the applicant whereby this letter commits the lender to provide funds to the applicant. 
B)  At the time the application is submitted, the mortgage originator will give the applicant a choice among various types of mortgages. 
C)  Mortgage originators cannot sell the mortgage to an investor that wishes to hold the mortgage in its portfolio. 
D)  The interest rate that the originator will set on the loan, referred to as the note rate, will depend on the interest rate required by the investor who plans to purchase the mortgage. 
A)  If a lender decides to lend the funds, it sends a commitment letter to the applicant whereby this letter commits the lender to provide funds to the applicant. 
B)  At the time the application is submitted, the mortgage originator will give the applicant a choice among various types of mortgages. 
C)  Mortgage originators cannot sell the mortgage to an investor that wishes to hold the mortgage in its portfolio. 
D)  The interest rate that the originator will set on the loan, referred to as the note rate, will depend on the interest rate required by the investor who plans to purchase the mortgage.

Exam 22: The Residential Mortgage Market

Which of the below statements is TRUE?

Mortgages are liquid assets because they tend to have a large bid-ask spread.

Homeowners seldom repay all or part of their mortgage balance prior to the scheduled maturity date.

What is the mission of Freddie Mac and Fannie Mae? What does their federal charter allow for?

Mortgage servicers include bank-related entities, thrift-related entities, and mortgage bankers. There are five sources of revenue from mortgage servicing. Describe two of these five sources.

Is prepayment risk like that faced by a bond investor? Discuss.

Because of prepayments, the investor is uncertain about the cash flows that will be realized from investing in a residential mortgage loan.

Prepayment risk is the risk associated with a mortgage's cash flow due to ________. More specifically, investors are concerned that borrowers will pay off a mortgage when prevailing mortgage rates fall ________ the loan's note rate.

To protect against price risk, the originator could get a commitment from the GSE or the private conduit from which the mortgage originator plans to buy the mortgage.

Qualifying for a conforming loan is important for both the borrower and the mortgage originator.

The principal originators of residential mortgage loans are ________.

The original mortgage balance (MB₀) is $350,000; and, the number of months of the mortgage loan (n) is 360. What is the monthly mortgage payment (MP) if the initial note rate (i) is 7.50%?

Which of the below statements is FALSE?

There are four main risks associated with investing in mortgages: credit risk, liquidity risk, price risk, and prepayment risk.

In regards the risks associated with mortgage origination, price risk is the risk that applicants or those who were issued commitment letters will not close (i.e., complete the transaction by purchasing the property with funds borrowed from the mortgage originator).

The ________ is the primary attribute used to characterize loans as either prime or subprime.

Pipeline risk refers to what we call market risk and dropdown risk.

Which of the below statements is FALSE?

Introduction

Financial Institutions, Financial Intermediaries, and Asset Management Firms

Depository Institutions: Activities and Characteristics

The U.S. Federal Reserve and the Creation of Money

Monetary Policy in the United States

Insurance Companies

Investment Companies and Exchange Traded Funds

Pension Funds

Properties and Pricing of Financial Assets

The Level and Structure of Interest Rates

The Term Structure of Interest Rates

Risk/Return and Asset Pricing Models

Primary Markets and the Underwriting of Securities

Secondary Markets

Treasury and Agency Securities Markets

Municipal Securities Markets

Markets for Common Stock: The Basic Characteristics

Markets for Common Stock: Structure and Organization

Markets for Corporate Senior Instruments: I

Markets for Corporate Senior Instruments: II

The Markets for Bank Obligations

Mortgage-Backed Securities Market

Market for Commercial Mortgage Loans and Commercial Mortgage-Backed Securities

Market for Asset-Backed Securities

Financial Futures Markets

Options Markets

Pricing of Futures and Options Contracts

The Applications of Futures and Options Contracts

OTC Interest Rate Derivatives: Forward Rate Agreements, Swaps, Caps, and Floors

Market for Credit Risk Transfer Vehicles: Credit Derivatives and Collateralized Debt Obligations

The Market for Foreign Exchange and Risk Control Instruments

Filters

Prepayment risk is the risk associated with a mortgage's cash flow due to . More specifically, investors are concerned that borrowers will pay off a mortgage when prevailing mortgage rates fall the loan's note rate.