Exam 9: Mortgage Markets

____ risk is the risk that a borrower may prepay the mortgage in response to a decline in interest rates.

A financial institution has a higher degree of interest rate risk on a ____ than a ____.

Caps on mortgage rate fluctuations with adjustable-rate mortgages (ARMs) are typically

A mortgage with low initial payments that increase over time without ever leveling off is a

____ was created in 1968 as a corporation that is wholly owned by the federal government. It guarantees payment on mortgages that meet specific criteria.

An increase in either the risk-free rate or the risk premium on a fixed-rate mortgage results in a higher required rate of return when investing in the mortgage and therefore causes the mortgageprice to decrease.

Speculators sell credit default swaps to benefit from the default of specific subprime mortgages.

Borrowers who have a lower level of income relative to the periodic loan payments are more likely to default on their mortgages.

Mortgage companies specialize in

____ mortgages enabled more people with relatively lower income, or high existing debt, or a small down payment to purchase homes.

Lehman Brothers commonly used _________ as collateral when borrowing short-term funds, but its funding was cut off because prospective creditors questioned the quality of the collateral.

Use an amortization schedule. A 15-year $100,000 mortgage has a fixed mortgage rate of 9 percent. In the first month, the total mortgage payment is $____, and $____ of this amount representspayment of interest.

Mortgage-backed securities are assigned ratings by:

At a given point in time, the price of a credit default swap contract should be ________ related to the default risk of the securities covered by the contract. For a given set of securities thatare covered by a credit default swap, the price of the contract should be _______ related to the default risk as it changes over time.

Which of the following will typically require homeowners to ultimately request a new mortgage?

Financial institutions may sell credit default swaps on mortgages if they expect defaults on many mortgages.

In a short sale of a home:

The valuation of mortgage-backed securities is difficult because of limited transparency.

Which of the following mortgages allows the home purchaser to obtain a mortgage at a below-market interest rate throughout the life of the mortgage?

Mortgage-backed securities are commonly contained within collateralized debt obligations.