Question 1

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 monthly payment on the mortgage pass-through if a 44 basis point servicing fee is deducted monthly?

Accepted Answer

A) $105,499. 
B) $114,700. 
C) $11,340. 
D) $1,055. 
E) $1,277,494.

Question 2

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 3

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

Accepted Answer

A) lower regulatory taxes. 
B) increased fee-based income. 
C) increased liquidity. 
D) decreased asset and liability duration mismatch. 
E) increased capital requirements.

Question 4

FNMA supports only those pools of mortgages that comprise mortgage loans whose default or credit risk is insured by one of three government agencies.

Accepted Answer

A) True 
 B)False

Question 5

GNMA pass-through bondholders can be protected against default risk by FHA/VA housing insurance.

Accepted Answer

A) True 
 B)False

Question 6

An FI funds a $5 million residential mortgage in 2012 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 deposit insurance premium on the demand deposits issued to fund the mortgage?

Accepted Answer

A) $11,756. 
B) $12,778. 
C) $11,500. 
D) $1,150. 
E) $9,200.

Question 7

Historically, FNMA has had a secured line of credit with the U.S. Treasury.

Accepted Answer

A) True 
 B)False

Question 8

The following information is for a collateralized mortgage obligation (CMO). Tranche A has a face value of $110 million and pays 5 percent annually. Tranche B has a face value of $90 million and pays 7 percent annually.
-If at the end of the first year, the CMO trustee receives total cash flows of $15 million, how are they distributed?

Accepted Answer

A)  $7.5 million to Tranche A and $7.5 million to Tranche B. 
B)  $15 million to Tranche A and nothing to Tranche B. 
C)  $5.5 million to Tranche A and $9.5 million to Tranche B. 
D)  $8.7 million to Tranche A and $6.3 million to Tranche B. 
E)  $7.1 million to Tranche A and $7.9 million to Tranche B.

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

A) The MBB bondholders have a junior claim to assets of the FI. 
B) There is no direct link between the cash flow on the mortgages backing the bond and the interest and principal payments on the MBB. 
C) The assets backing a MBB issue are normally removed from the balance sheet of the FI. 
D) Tranches of a MBB are treated equally with respect to prepayments on mortgages backing the bond issue. 
E) None of the above.

Question 11

One advantage of asset securitization to a bank is the ability to originate new assets before the original assets have matured.

Accepted Answer

A) True 
 B)False

Question 12

Depository institutions have followed and originate-to-distribute model of loan origination only since the Financial Services Modernization Act of 1999.

Accepted Answer

A) True 
 B)False

Question 13

GNMA is more active in the market for mortgage pass-through securities than either FNMA or FHLMC.

Accepted Answer

A) True 
 B)False

Question 14

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 above. 
E) Answers B and C only.

Question 15

Which of the following are functions of GNMA?

Accepted Answer

A) Engaging in swap transactions where it swaps mortgage-backed securities with an FI for original mortgages. 
B) Sponsors mortgage-backed securities programs by FIs such as banks, thrifts, and mortgage bankers. 
C) Acts as a guarantor to investors in mortgage-backed securities regarding the timely pass-through of principal and interest payments on their sponsored bonds. 
D) All of the above. 
E) Answers B and C only.

Question 16

An FI funds a $5 million residential mortgage in 2012 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. 
E) $5,000,000.

Question 17

On September 7, 2008, FNMA and FHLMC were placed under conservatorship and both are controlled by a federal government agency.

Accepted Answer

A) True 
 B)False

Question 18

A principal-only (PO) mortgage pass-through strip security is attractive to investors that wish to increase the interest rate sensitivity of their portfolio.

Accepted Answer

A) True 
 B)False

Question 19

A claim to the present value of the interest payments made by the mortgage holders in a GNMA pool is

Accepted Answer

A) a CARS. 
B) an IO strip. 
C) a CARD. 
D) a PO strip. 
E) a prepayment claim.

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?

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

FNMA supports only those pools of mortgages that comprise mortgage loans whose default or credit risk is insured by one of three government agencies.

GNMA pass-through bondholders can be protected against default risk by FHA/VA housing insurance.

Historically, FNMA has had a secured line of credit with the U.S. Treasury.

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

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

One advantage of asset securitization to a bank is the ability to originate new assets before the original assets have matured.

Depository institutions have followed and originate-to-distribute model of loan origination only since the Financial Services Modernization Act of 1999.

GNMA is more active in the market for mortgage pass-through securities than either FNMA or FHLMC.

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?

Which of the following are functions of GNMA?

On September 7, 2008, FNMA and FHLMC were placed under conservatorship and both are controlled by a federal government agency.

A principal-only (PO) mortgage pass-through strip security is attractive to investors that wish to increase the interest rate sensitivity of their portfolio.

A claim to the present value of the interest payments made by the mortgage holders in a GNMA pool is

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.