Exam 23: Mortgage-Backed Securities Market

Which of the below statements is TRUE?

There are public issuers of mortgage pass-through securities that are explicitly or implicitly guaranteed by the U.S. government; these securities are called nonagency pass-through securities.

A mortgage pass-through security is created when one or more holders of mortgages form a collection (pool) of mortgages and sell shares or PCs in the pool.

Tranche types that have been included in a CMO structure are sequential-pay bonds, accrual bonds (or Z-bonds), PAC bonds, and support bonds.

________ is more commonly used as a form of credit enhancement in subprime deals than in prime deals.

Which of the below statements is TRUE?

The agency mortgage-backed security market includes three types of securities: ________.

There are two types of stripped mortgage-backed securities: partially stripped and IO/PO securities.

Securitization - the financial framework that allowed Wall Street to package these loans into RMBS - is of enormous benefit to the economy.

Agency pass-through securities are issued by ________.

Some institutional investors are concerned with extension risk and others with contraction risk when they invest in a pass-through. This problem can be mitigated by redirecting the cash flows of mortgage pass-through securities ________.

The three major types of pass-through securities are guaranteed by either Freddie Mac (a federally related entity), Fannie Mae (a government-sponsored enterprise), or Ginnie Mae (a government-sponsored enterprise), and are referred to as agency pass-through securities.

A CMO is a security backed by a pool of mortgage pass-through securities or mortgages and is referred to as a derivative security.

The securitization of subprime loans works by dividing pools of credit into classes, or tranches, separated by the amount of risk each class represents.

Just like a support bond, a CMO reduces the uncertainty concerning the maturity of a tranche, thereby providing a risk/return pattern not available with typical mortgage pass-through securities.

In ________, the loans are pooled and used to create different bond classes, which we refer to as ________.

The mission of Fannie Mae and Freddie Mac is to support the liquidity and stability of the mortgage market by ________.

Which of the below statements is FALSE?

Nonagency MBS are issued by conduits of ________.

A PAC bond is a class of bonds designed to reduce prepayment risk by specifying a schedule for the amortization of the principal owed to the bondholder; the reduction in the prepayment risk comes at the expense of the support bonds.