Exam 26: Securitization

An FI funds a $5 million residential mortgage in 2017 by allocating capital and by issuing demand deposits.The mortgage represents a loan-to-value of 70 percent.The demand deposits have a reserve requirement of 10 percent and a deposit insurance premium of 23 basis points. What is the minimum capital requirement on the mortgage in order for the institution to be adequately capitalized?

When FIs form off-balance sheet subsidiaries to remove assets from their balance sheet,the subsidiary activities

One hundred identical mortgages are pooled together into a pass-through security.Each mortgage has a $150,000 principal,a fixed annual interest rate of 8 percent (paid monthly),and is fully amortized over a term of 30 years. For the first monthly payment,what portion is principal and what portion is interest?

Which of the following is NOT true of an R class CMO issue?

FNMA does not hold the mortgages it purchases on its balance sheet,thereby transferring credit and default risk to investors purchasing its securities.

The value of an interest-only (IO)mortgage-backed strip is not sensitive to changes in current market interest rates.

The life span of an SPV (Special Purpose Vehicle)is limited to

Investors in GNMA pass-through securities are exposed to the risk that the originating bank may fail,and the risk that the trustee may mismanage monthly interest and principal payments collected.

Most mortgage-backed bond issues conducted by depository institutions are under-collateralized.

The underlying GNMA 15-year mortgage pool has a principal amount of $50 million and an annual yield of 6 percent (paid monthly).Assume that there are no prepayments. What is the first monthly payment on the Interest Only (IO)strip?

Why are the regular GNMA pass-through not very attractive to insurance companies and pension funds seeking long-term duration assets to match their long-term duration liabilities?

One hundred identical mortgages are pooled together into a pass-through security.Each mortgage has a $150,000 principal,a fixed annual interest rate of 8 percent (paid monthly),and is fully amortized over a term of 30 years. What is the present value of the mortgage pass-through if,immediately after origination,interest rates increase to 8.25 percent per annum?

Mortgage-backed bonds (MBB)differ from pass-through and CMOs in which of the following ways?

At market rates substantially below the mortgage coupon rate of an interest-only (IO)mortgage-backed strip,the prepayment effect will dominate the discount effect resulting in a decrease in the price of the IO strip.

GNMA helps create pass-through asset-backed securities by providing timing insurance.

GNMA is a privately-owned entity.

Securitization of assets increases the FI's capital requirements.

All else equal,advantages of a DI operating as an asset broker in regard to mortgages includes all of the following EXCEPT

An interest-only (IO)mortgage-backed strip is a rare example of a negative duration asset.

Which of the following are functions of GNMA?