Chat with AIExam 24: Managing Risk Off the Balance Sheet With Loan Sales and Securitization
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?
(73) 
VerifiedNet origination fee income = (500 × $255,000)× (1% − 0.4%)= $765,000 Monthly mortgage payments: N = 360,I = 6.25/12,FV = 0,PV = −255,000,solve for PMT to get 1570.08 per average mortgage. Total = 500 × 1570.08 = 785,039.43 for 500 mortgages The bank nets 35 − 12 = 23 basis points on this total per month or 0.0023 × $785,039.43 × 12 months = $21,667.09 per year Total annual net fee income = $765,000 + $21,667 = $786,667
Why are MBBs the least used form of mortgage securitization?
(75) VerifiedThe process of creating pass-throughs and CMOs removes mortgages from FI balance sheets; the creation of MBBs does not. The purpose of issuing MBBs instead of debentures is to provide collateral to the bondholder to improve the credit rating and get a lower debt cost. However,the issuer of the MBB bears all the prepayment risk (just as in a pass-through the investor bears all the prepayment risk),so the bonds issued must be substantially overcollateralized. They also do not eliminate the regulatory tax burden,nor improve diversification. These drawbacks limit their attractiveness to issuers.
Why has securitization progressed most rapidly for home mortgages?
(68) VerifiedHome mortgages have standard maturities and easily appraisable collateral; default insurance is provided by FHA,VA,FMHA,or some private source to alleviate the need for security investors to assess default risk. These features make it easier to create and sell large amounts of marketable securities for mortgages than for other loan types.
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.
(76) 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.
(75) HLT loans are long maturity loans backed by the borrower's assets with floating interest rates tied to the Federal Funds rate.
(81) How does mortgage securitization reduce the regulatory tax burden of a depository institution?
(86) What are the major differences in the traditional and HLT segments of the loan sale market with respect to the types of loans sold?
(84) Advantages of Brady bonds over LDC loans include improved liquidity and higher coupon rates.
(74) The FDIC is concerned about issuance of mortgage-backed bonds (MBBs)because
(76) In a loan participation,which of the following is/are true?
I. The loan buyer has no part in the original underlying credit agreement,even after purchase of the loan.
II. If the selling bank fails,the loan buyer's claim against the selling bank may be treated as unsecured.
III. In the event the selling bank fails,the original borrower's deposits may be used to reduce the loan amount without any proceeds going to the loan buyer.
(80) Loan sale by assignment provide more control over the contract to the loan buyer than participations loans.
(86) 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?
(81) 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.
If the mortgages are securitized and deposits are reduced,how much will the bank save in the first year's reserve requirements and deposit insurance premiums in total?
(81) The act of buying a share in a loan syndication with limited contractual control and rights over the borrower is called a
(73) 
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