Question 1

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 Principal Only (PO)strip?

Accepted Answer

A) $3 million. 
B) $421,928. 
C) $250,000. 
D) $299,775. 
E) $171,928.

Question 2

Prepayment models are attempts by professional mortgage portfolio managers to estimate the rate of prepayment on given mortgage pools.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following factors occurred in the early 2000s and created concerns about the ability of Fannie Mae and Freddie Mac to manage their portfolios of assets?

Accepted Answer

A) Fannie Mae miscalculated the value of its mortgages that created a restatement of its stockholder equity. 
B) Both agencies overcharged lenders for services they provided. 
C) Fannie Mae operated for some time with a sharp increase in interest rate risk on its balance sheet. 
D) All of the options.

Question 4

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 would have been the capital requirements if the FI had securitized the mortgage?

Accepted Answer

A) $0. 
B) $400,000. 
C) $200,000. 
D) $500,000.

Question 5

GNMA pass-through can assist an FI in resolving duration mismatch and illiquidity risk problems.

Accepted Answer

A) True 
 B)False

Question 6

Mortgage pools that are assumed to prepay at a rate of speed that is more rapid than the PSA model would indicate,are said to prepay at less than 100 percent PSA behavior because the mortgage life and balance will exist for a longer time.

Accepted Answer

A) True 
 B)False

Question 7

CMOs are typically created from existing GNMA pass-through securities that are held in trust.

Accepted Answer

A) True 
 B)False

Question 8

A commercial bank operating under an originate-to-distribute model is acting most like

Accepted Answer

A) an asset transformer. 
B) an asset broker. 
C) a portfolio lender. 
D) an asset accumulator.

Question 9

The following information is for a collateralized mortgage obligation (CMO).Tranche A has a face value of $50 million and pays 6 percent annually.Tranche B has a face value of $50 million and pays 8 percent annually.All mortgages have maturities of 30 years. What are the principals outstanding on Tranches A and B,respectively,after the CMO distributes the $10 million of cash flows?

Accepted Answer

A) $50 million;$47 million. 
B) $47 million;$50 million. 
C) $48 million;$48 million. 
D) $50 million;$48 million.

Question 10

Which of the following is an incentive to securitize mortgage assets?

Accepted Answer

A) To reduce the regulatory tax burden on the FI. 
B) To adjust the gap exposure of the FI. 
C) To improve the liquidity of the FI. 
D) To generate non-interest sensitive fee income. 
E) All of the options.

Question 11

Full amortization of a thirty-year fixed rate mortgage means that monthly payments are equal and include both principal and interest.

Accepted Answer

A) True 
 B)False

Question 12

Mortgage-backed bonds differ from CMOs and pass-through securities in that there is no direct link between the cash flows on the mortgages and the interest and principal payments on the bonds.

Accepted Answer

A) True 
 B)False

Question 13

Certificates of Amortizing Revolving Debts are asset-backed securities that have a claim on automobile installment loans.

Accepted Answer

A) True 
 B)False

Question 14

Servicing a pass-through security refers to

Accepted Answer

A) an FI processing of all payments. 
B) an FI provision of clearing services to set up the pass-through. 
C) broker/dealer services provided by the FI to the ultimate holders of the pass-through. 
D) guarantee by the FI of all principal and interest payments.

Question 15

Which type of loans are securitized most often?

Accepted Answer

A) Residential mortgages. 
B) Credit card loans. 
C) Auto loans. 
D) Student loans.

Question 16

One difference between a special purpose vehicle (SPV)and a structured investment vehicle (SIV)is

Accepted Answer

A) there is no difference;these are just two different names for the same type of subsidiary. 
B) the SPV has stockholders that share in the profits;the SIV only has debt. 
C) the SIV ceases to exist when the loans in its portfolio cease to exist;the SPV outlives its loan portfolio. 
D) the SPV is allowed to accept deposits while the SIV must rely solely on other borrowings. 
E) the SIV raises funds first and then acquires loans from the sponsoring FI;the SPV receives the loans first and creates an asset-backed security which it sells and transfers the funds back to the sponsoring FI.

Question 17

The call option held by the residential mortgage holder is in the money when market interest rates are less than the interest rate on an existing mortgage.

Accepted Answer

A) True 
 B)False

Question 18

The characteristics of a Collateralized Mortgage Obligation (CMO)securities issue include all of the following EXCEPT

Accepted Answer

A) the tranches will have different coupon rates. 
B) the CMO securities are insured separately from the GNMA pass-through securities. 
C) the principal payments are made totally to the earliest remaining tranche. 
D) GNMA pass-through securities are used as collateral in a trust to support the CMOs.

Question 19

The securities that form a GNMA pass-through are U.S.Treasury bonds,bills,and notes.

Accepted Answer

A) True 
 B)False

Question 20

A bad news effect of increased mortgage prepayments on a mortgage pool caused by decreasing market interest rates includes a reduction in the discount rate on the mortgage cash flow.

Accepted Answer

A) True 
 B)False

Exam 26: Securitization

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 Principal Only (PO) strip?

Prepayment models are attempts by professional mortgage portfolio managers to estimate the rate of prepayment on given mortgage pools.

Which of the following factors occurred in the early 2000s and created concerns about the ability of Fannie Mae and Freddie Mac to manage their portfolios of assets?

GNMA pass-through can assist an FI in resolving duration mismatch and illiquidity risk problems.

Mortgage pools that are assumed to prepay at a rate of speed that is more rapid than the PSA model would indicate,are said to prepay at less than 100 percent PSA behavior because the mortgage life and balance will exist for a longer time.

CMOs are typically created from existing GNMA pass-through securities that are held in trust.

A commercial bank operating under an originate-to-distribute model is acting most like

Which of the following is an incentive to securitize mortgage assets?

Full amortization of a thirty-year fixed rate mortgage means that monthly payments are equal and include both principal and interest.

Mortgage-backed bonds differ from CMOs and pass-through securities in that there is no direct link between the cash flows on the mortgages and the interest and principal payments on the bonds.

Certificates of Amortizing Revolving Debts are asset-backed securities that have a claim on automobile installment loans.

Servicing a pass-through security refers to

Which type of loans are securitized most often?

One difference between a special purpose vehicle (SPV) and a structured investment vehicle (SIV) is

The call option held by the residential mortgage holder is in the money when market interest rates are less than the interest rate on an existing mortgage.

The characteristics of a Collateralized Mortgage Obligation (CMO) securities issue include all of the following EXCEPT

The securities that form a GNMA pass-through are U.S.Treasury bonds,bills,and notes.

A bad news effect of increased mortgage prepayments on a mortgage pool caused by decreasing market interest rates includes a reduction in the discount rate on the mortgage cash flow.