Question 1

The process of mortgage securitization results in a separation between mortgage origination and mortgage financing.

Accepted Answer

A) True 
 B)False

Question 2

An adjustable rate mortgage originator is adversely affected by ________ interest rates while the borrower is adversely affected by ________ interest rates.

Accepted Answer

A) increasing; decreasing 
B) increasing; increasing 
C) decreasing; decreasing 
D) decreasing; increasing 
E) stable; decreasing 
A) increasing; decreasing 
B) increasing; increasing 
C) decreasing; decreasing 
D) decreasing; increasing 
E) stable; decreasing

Question 3

A fixed-rate mortgage originator is adversely affected by ________ interest rates while the borrower is adversely affected by ________ interest rates.

Accepted Answer

A) increasing; decreasing 
B) increasing; increasing 
C) decreasing; decreasing 
D) decreasing; increasing 
E) stable; decreasing 
A) increasing; decreasing 
B) increasing; increasing 
C) decreasing; decreasing 
D) decreasing; increasing 
E) stable; decreasing

Question 4

A homeowner can obtain a $250,000,30-year fixed-rate mortgage at a rate of 6.0 percent with zero points or at a rate of 5.5 percent with 2.25 points.
How long must the owner stay in the house to make it worthwhile to pay the points if the payment saving is not invested?

Accepted Answer

A) 7.15 years 
B) 3.33 years 
C) 6.04 years 
D) 5.90 years 
E) More than 30 years 
A) 7.15 years 
B) 3.33 years 
C) 6.04 years 
D) 5.90 years 
E) More than 30 years

Question 5

A(n)________ is used to help retired people receive monthly income in exchange for the equity in their home.

Accepted Answer

A) SAM 
B) Equity Participation Mortgage 
C) RAM 
D) PLAM 
E) GEM 
A) SAM 
B) Equity Participation Mortgage 
C) RAM 
D) PLAM 
E) GEM

Question 6

GNMA role is to provide insurance to pass through mortgage securities.

Accepted Answer

A) True 
 B)False

Question 7

A borrower using a conventional mortgage will have to put up at least a 20 percent down payment or purchase private mortgage insurance.

Accepted Answer

A) True 
 B)False

Question 8

The largest category of mortgages by dollar volume is commercial mortgages.

Accepted Answer

A) True 
 B)False

Question 9

You want to buy a $250,000 house and you will use a conventional mortgage. What is the minimum down payment you have to make to avoid having to purchase mortgage insurance?

Accepted Answer

A) $10,000 
B) $20,000 
C) $30,000 
D) $40,000 
E) $50,000 
A) $10,000 
B) $20,000 
C) $30,000 
D) $40,000 
E) $50,000

Question 10

You obtain a $265,000,15-year fixed-rate mortgage. The annual interest rate is 6.25 percent. In addition to the principal and interest paid,you must pay $275 a month into an escrow account for insurance and taxes. What is the total monthly payment (to the nearest dollar)?

Accepted Answer

A) $2,272 
B) $1,632 
C) $2,547 
D) $1,907 
E) $2,311 
A) $2,272 
B) $1,632 
C) $2,547 
D) $1,907 
E) $2,311

Question 11

Why have FNMA and Freddie Mac,considered government-sponsored enterprises (GSEs),been in the news lately? Explain.

Accepted Answer

In the early 2000s,the agencies were in

Question 12

Pass through mortgage securities are for primary market investors.

Accepted Answer

A) True 
 B)False

Question 13

A Collateralized mortgage obligation (CMO)has:

Accepted Answer

A) no interest rate risk. 
B) no default risk. 
C) no prepayment risk. 
D) high degree of interest rate risk. 
E) no default,no prepayment and no interest rate risks. 
A) no interest rate risk. 
B) no default risk. 
C) no prepayment risk. 
D) high degree of interest rate risk. 
E) no default,no prepayment and no interest rate risks.

Question 14

The schedule showing how monthly mortgage payments are split into principal and interest is called a(n)

Accepted Answer

A) securitization schedule. 
B) balloon payment schedule. 
C) graduated payment schedule. 
D) amortization schedule. 
E) growing equity schedule. 
A) securitization schedule. 
B) balloon payment schedule. 
C) graduated payment schedule. 
D) amortization schedule. 
E) growing equity schedule.

Question 15

In synthetic securitization,the transfer of risk on a pool of assets is achieved by the use of credit derivatives or guarantees to a third party.

Accepted Answer

A) True 
 B)False

Question 16

As compared to fixed-rate mortgages,ARMs result in which of the following for the lender?
I. Higher interest rate risk
II. Lower default risk
III. Greater prepayment penalty fees

Accepted Answer

A) I,II,and III 
B) I and II only 
C) II and III only 
D) I and III only 
E) None of these choices are correct. 
A) I,II,and III 
B) I and II only 
C) II and III only 
D) I and III only 
E) None of these choices are correct.

Question 17

An MBB differs from a CMO or a pass-through in that
I. the MBB does not result in the removal of mortgages from the balance sheet.
II. a MBB holder has no prepayment risk.
III. cash flows on a MBB are not directly passed through from mortgages.

Accepted Answer

A) I,II,and III 
B) I and II only 
C) II and III only 
D) I and III only 
E) I only 
A) I,II,and III 
B) I and II only 
C) II and III only 
D) I and III only 
E) I only

Question 18

Subprime mortgage borrowers usually have poorer credit ratings or lower income levels compared to conventional mortgage borrowers.

Accepted Answer

A) True 
 B)False

Question 19

Which one of the following entities is an actual government-owned enterprise dealing with mortgages?

Accepted Answer

A) GNMA 
B) FNMA 
C) FHLMC 
D) PIP 
E) CMO 
A) GNMA 
B) FNMA 
C) FHLMC 
D) PIP 
E) CMO

Question 20

The borrower of an amortized mortgage makes most of the payment during the early life of the mortgage:

Accepted Answer

A) towards the principal. 
B) towards the interest. 
C) equally towards the principal and interest. 
D) mostly towards the principal rather than interest. 
E) None of these choices are correct. 
A) towards the principal. 
B) towards the interest. 
C) equally towards the principal and interest. 
D) mostly towards the principal rather than interest. 
E) None of these choices are correct.

Exam 7: Mortgage Markets

The process of mortgage securitization results in a separation between mortgage origination and mortgage financing.

An adjustable rate mortgage originator is adversely affected by ________ interest rates while the borrower is adversely affected by ________ interest rates.

A fixed-rate mortgage originator is adversely affected by ________ interest rates while the borrower is adversely affected by ________ interest rates.

A homeowner can obtain a $250,000,30-year fixed-rate mortgage at a rate of 6.0 percent with zero points or at a rate of 5.5 percent with 2.25 points. How long must the owner stay in the house to make it worthwhile to pay the points if the payment saving is not invested?

A(n)________ is used to help retired people receive monthly income in exchange for the equity in their home.

GNMA role is to provide insurance to pass through mortgage securities.

A borrower using a conventional mortgage will have to put up at least a 20 percent down payment or purchase private mortgage insurance.

The largest category of mortgages by dollar volume is commercial mortgages.

You want to buy a $250,000 house and you will use a conventional mortgage. What is the minimum down payment you have to make to avoid having to purchase mortgage insurance?

You obtain a $265,000,15-year fixed-rate mortgage. The annual interest rate is 6.25 percent. In addition to the principal and interest paid,you must pay $275 a month into an escrow account for insurance and taxes. What is the total monthly payment (to the nearest dollar)?

Why have FNMA and Freddie Mac,considered government-sponsored enterprises (GSEs),been in the news lately? Explain.

Pass through mortgage securities are for primary market investors.

A Collateralized mortgage obligation (CMO)has:

The schedule showing how monthly mortgage payments are split into principal and interest is called a(n)

In synthetic securitization,the transfer of risk on a pool of assets is achieved by the use of credit derivatives or guarantees to a third party.

As compared to fixed-rate mortgages,ARMs result in which of the following for the lender? I. Higher interest rate risk II. Lower default risk III. Greater prepayment penalty fees

An MBB differs from a CMO or a pass-through in that I. the MBB does not result in the removal of mortgages from the balance sheet. II. a MBB holder has no prepayment risk. III. cash flows on a MBB are not directly passed through from mortgages.

Subprime mortgage borrowers usually have poorer credit ratings or lower income levels compared to conventional mortgage borrowers.

Which one of the following entities is an actual government-owned enterprise dealing with mortgages?

The borrower of an amortized mortgage makes most of the payment during the early life of the mortgage:

Introduction

Determinants of Interest Rates

Interest Rates and Security Valuation

The Federal Reserve System, monetary Policy, and Interest Rates

Money Markets

Bond Markets

Stock Markets

Foreign Exchange Markets

Derivative Securities Markets

Commercial Banks: Industry Overview

Commercial Banks Financial Statements and Analysis

Regulation of Commercial Banks

Other Lending Institutions: Savings Institutions, credit Unions, and Finance Companies

Insurance Companies

Securities Firms and Investment Banks

Investment Companies

Pension Funds

Types of Risks Incurred by Financial Institutions

Managing Credit Risk on the Balance Sheet

Managing Liquidity Risk on the Balance Sheet

Managing Interest Rate Risk and Insolvency Risk on the Balance Sheet

Managing Risk Off the Balance Sheet With Derivative Securities

Managing Risk Off the Balance Sheet With Loan Sales and Securitization

Filters

An adjustable rate mortgage originator is adversely affected by interest rates while the borrower is adversely affected by interest rates.

A fixed-rate mortgage originator is adversely affected by interest rates while the borrower is adversely affected by interest rates.