FI 301 CH. 9 (exam 2)

(Use an amortization schedule.) A 15-year, $100,000 mortgage has a fixed mortgage rate of 9 percent. In the first month, the total mortgage payment is $_______, and $_______ of this amount represents payment of interest.

1,014; 750

_______ was created in 1968 as a corporation that is wholly owned by the federal government. It supplies funds to low- and moderate-income homeowners indirectly by facilitating the flow of funds into secondary mortgage markets.

Ginnie Mae

Commercial banks and savings institutions are the primary originators of mortgages. (T/F)

True

The majority of mortgage debt is on one- to four-family properties. (T/F)

True

The adjustable-rate mortgage creates uncertainty for the _______ profit margin, but reduces the uncertainty for the _______.

borrower's; originator

The issuance of pass‑through securities by financial institutions that provide mortgages:

can reduce their interest rate risk

The difference between the 30-year mortgage rate and the 30-year Treasury bond rate is primarily attributable to _______ risk.

credit

A ___________ is a privately negotiated contract that protects investors against the risk of default on particular debt securities such as mortgage-backed securities

credit default swap

Mortgage prices would normally be expected to _______ when the budget deficit _______, holding other factors constant.

increase; decreases

An institution that originates and holds a fixed‑rate mortgage is adversely affected by _______ interest rates; the borrower who was provided the mortgage is adversely affected by _______ interest rates.

increasing; decreasing

In an amortization schedyle of monthly mortgage payments:

interest payments exceed principal payments early on

Fannie Mae and Freddie Mac experienced financial problems during the credit crisis because they:

invested heavily in subprime mortgages

_______ risk is the risk that a borrower may prepay the mortgage in response to a decline in interest rates.

prepayment

_______ are backed by conventional mortgages

private-label pass-through securities

Which pass‑through security is backed by mortgages that are insured through private insurance companies?

publicly issued pass-through securities (PIPs)

The _______ market accommodates originators of mortgages that desire to sell their mortgages prior to maturity

secondary

Which of the following mortgages allows the home purchaser to obtain a mortgage at a below‑market interest rate throughout the life of the mortgage?

shared-appreciation mortgage

The interest rate received by purchasers of the mortgage pass‑through securities is _______ the interest rate on the mortgages serving as collateral.

slightly less than

Which of the following is not a guarantor of federally insured mortgages?

the U.S. Treasury

When financial institutions originate residential mortgages, the mortgage contract should probably not specify:

the mortgage contract should specify all of these

A financial institution that prefers to invest in mortgages for long periods of time or to generate fee income would likely:

originate mortgages

Mortgage companies specialize in:

originating mortgages and selling those mortgages

Caps on mortgage rate fluctuations with adjustable-rate mortgages (ARMs) are typically _______ percent per year and _______ percent for the mortgage lifetime.

2; 5

A financial institution has a higher degree of interest rate risk on a ______ than a ________

30‑year fixed‑rate mortgage; 15‑year fixed‑rate mortgage

From the perspective of the lending financial institution, there is a ______ degree of interest rate risk for _______-maturity mortgages

B and C (higher; longer and lower;shorter)

"Securitization" refers to the private insurance of conventional mortgages. (T/F)

False

A balloon-payment mortgage requires interest payments for a 10- to 20-year period, at the end of which the borrower must pay the full amount of the principal. (T/F)

False

Collateralized mortgage obligations (CMOs) are generally perceived to have:

a high degree of prepayment risk

At a given point in time, the interest rate offered on a new fixed-rate mortgage is typically _______ the initial interest rate offered on a new adjustable-rate mortgage

above

The probability that a borrower will default (credit risk) is influenced by all of the following esxcept

all of the above

Rates for adjustable-rate mortgages are commonly tied to the

average Treasury bill rate over the previous year

Which of the following is not a common type of mortgage-backed securities according to the text?

balloon-payment mortgage

A mortgage which requires interest payments for a three- to five-year period, then full payment of principal is a

ballooon payment mortgage

A _______ mortgage allows borrowers to initially make small payments on the mortgage, which are then increased on a graduated basis over the first five to ten years; payments then level off from there on.

graduated payment

A _______ mortgage allows the borrower to initially make small payments on the mortgage. The payments then increase over the first 5 to 10 years and then level off.

graduated payment

For any given interest rate, the shorter the life of the mortgage, the _______ the monthly payment and the _______ the total payments over the life of the mortgage.

greater; less

A mortgage with low initial payments that increase over time without ever leveling off is a _______ mortgage.

growing-equity

The interest rate on a second mortgage is _______ a first mortgage created at the same time, because the second mortgage is _______ the existing first mortgage in priority claim against the property in the event of default.

higher than; behind

The credit crisis is mostly attributed to the use of:

liberal criteria applied by mortgage originators

Federally insured mortgages guarantee

loan repayment to the lending financial institution

From the perspective of the lending financial institution, interest rate risk is:

lower on a 15-year fixed-rate mortgage than on a 30-year fixed-rate mortgage.

During a weak economy, the credit risk to a financial institution from investing in mortgage-backed securities representing subprime mortgages is ____ than that of mortgage-backed securities representing prime mortgages

more than

During the early years of a mortgage,

most of the monthly payment reflects interest

_______ economic growth will probably _______ the risk premium on mortgages and _______ the price of mortgages.

weak; decrease; increase