Exam 24: Managing Risk Off the Balance Sheet With Loan Sales and Securitization

Because of the government backing,investors in GNMA pass-throughs are guaranteed to earn at least the T-bill rate on their investments.

Important buyers of loans include all but which one of the following?

What are the major differences in the traditional and HLT segments of the loan sale market with respect to the types of loans sold?

Advantages of Brady bonds over LDC loans include improved liquidity and higher coupon rates.

Explain the payment pattern on a GNMA pass-through and a new Class B CMO when interest rates fall. Which has more predictable payments,and why would an investor care?

The sale or transfer of assets at less than fair value that occurs at a time when the seller is insolvent is termed fraudulent conveyance.

On January 1 a bank had originated 500 30-year fixed rate mortgages with a 6.25 percent coupon at par. The average mortgage size is $255,000. The bank charges a 1 percent origination fee for each mortgage,but processing costs amount to 0.4 percent. After securitization the bank will retain 35 basis points in fee income for servicing the mortgage payments. The cost of this processing is 12 basis points. What is the total amount of net fee revenue generated from the mortgages over the year?

A three-class (Class A,B,and C)sequential pay CMO starts with an $80 million principal amount in each class. The mortgages in the pool have a 7 percent interest rate. The CMO classes receive monthly payments. During the first month,$1 million in interest is received from mortgage holders and $1.5 million in principal. What principal amounts are outstanding for each class during the second month? How will this affect the total payment each class receives? Explain.

An investor in a GNMA mortgage-backed security may be able to earn a return higher than the rate on a comparable maturity Treasury without taking on much,if any,default risk.

Characteristics of loan participations include the following: I. The loan participant is not a primary creditor on the loan. II. The original lender can change some loan terms without the participant's permission. III. Participations are without recourse.

The typical duration of a Class B CMO is

A loan sold without recourse generates a contingent liability for the selling bank.

The buyer of a loan in a participation has a double-risk exposure: one to the borrower and one to the selling bank.

Loans sold to correspondent banks are predominantly sales of distressed HLT loans.

Why are MBBs the least used form of mortgage securitization?

How does a mortgage pass-through differ from a CMO?

In a three-class sequential pay CMO,if we consider Class B holders as having average prepayment risk,then Class A holders have _____________ prepayment risk and Class C holders have _____________ prepayment risk.

A bank originates $150,000,000 worth of 30-year single-family mortgages funded by demand deposits and the required amount of capital. Reserve requirements are 10 percent and the bank pays 32 basis points in deposit insurance premiums. The bank is earning a 6.25 percent coupon on the mortgages. The mortgages are priced at par and total monthly payments on the mortgages are $923,576. How much capital is required to back the mortgages if the minimum risk-based capital requirement is 8 percent?

Why are most loan sales on an assignment basis rather than a participation basis?

Which one of the following types of transactions leaves the assets on the balance sheet?