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

In selling loans,FIs act as an asset ________ and in creating CMOs,FIs act as an asset ________.

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?

An advantage of securitization and loan sales over interest rate swaps as a risk-management tool is that securitization,by removing loans from the balance sheet,reduces the regulatory tax imposed by existing regulations.

What loans,other than mortgages,are currently being securitized?

When a vulture fund acquires a distressed loan,the fund usually assists the distressed firm's managers in formulating a long-term plan for restoring profitability.

For a loan sold with recourse,

What are the major factors that are likely to contribute to continued growth in the loan sale market?

Advantages of loan sales and securitization typically include all but which one of the following?

A mortgage pass-through security is a bond issue backed by a group of mortgages that pays fixed semiannual coupon payments and the principal is repaid only at maturity.

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.

Which one of the following forms of securitization is usually "double securitization"?

A CMO is a multiclass pass-through that helps investors choose the amount of prepayment risk they will face.

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

Vulture funds specialize in buying distressed loans.

A loan that finances a merger or acquisition that results in a high-leverage ratio for the borrower is called a

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

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. The bank keeps a capital-to-asset ratio of 8 percent. If the bank does not securitize the mortgages,they will be fully funded with demand deposits that have a reserve requirement of 10 percent. The demand deposits also have a deposit insurance premium of 0.20 cents per $100 of deposits. If the bank securitizes the mortgages,how much less capital will the bank require? If the savings from not having the required reserves and the deposit insurance premiums could be invested at 5 percent,what is the dollar opportunity cost of not securitizing?

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 bank can originate and securitize this amount of mortgages with the same terms four times over the next year (including the existing mortgages)and the bank earns a servicing fee each month equal to 3.5 percent of the monthly payments,what will be the bank's monthly fee income 12 months from now?

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.

In collateralized mortgage obligations,Class A holders have higher prepayment risk protection than class C holders.