FINC412 Chapter 9

in a short sale of a home

B and C the lender allows the homeowner to sell the home for less than what is owed on the mortgage the lender does not recover the full amount of the mortgage

At a given point in time, the price of a credit default swap contracts should be ___ related to the default risk of the securities covered by the contract. For a given set of securities that re covered by a credit default swap, the price of the contract should be ___ related to the default risk as it changes over time

Positively; positively

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

rates for adjustable-rate mortgages are commonly tied to the

average Treasury bill rate over the previous year

A mortgage that requires interest payments for a 3-5 year period, then full payment of principal, is a(n)

balloon-payment mortgage

which of the following will typically require homeowners to ultimately request a new mortgage?

balloon-payment mortgage

which of the following is not a common type of mortgage-backed security according to your text?

balloon-payment mortgage certificates

The interest rate on a second mortgage is ___ on 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

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

Financial institutions that hold fixed-rate mortgages in their asset portfolios are exposed to ___ risk, because they commonly use funds obtained from short-term customer deposits to make long-term mortgage loans

interest rate

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

invested heavily in subprime mortgages

which of the following is not true with respect to a growing-equity mortgage?

it involves payments that level off after the first 5 to 10 years of the mortgage

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

A(n) ___ problem occurs when a person or institution does not have to bear the full consequences of its behavior and therefore assumes more risk than it otherwise would

moral hazard

in the earlier years of a mortgage

most of the monthly payment reflects interest

Mortgage companies specialize in

originating mortgages and selling those mortgages

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

prepayment

mortgage-backed securities are assigned ratings by:

rating agencies

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

___ mortgages enabled more people with relatively lower income, or high existing debt, or a small down payment to purchase homes

subprime

which of the following is not a correct description of qualified mortgages?

they must be retained by the lending institution that originated the mortgages and cannot be sold

in a collateralized mortgage obligation (CMO), mortgages are segmented into ___ (or classes).

tranches

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

whether the mortgage is federally insured

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

False

T/F. 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

False

T/F. An investor in interest-only collateralized mortgage obligation (CMOs) would not be concerned that homeowners will prepay the underlying mortgages

False

T/F. During the early years of a mortgage, most of the monthly payment reflects principal.

False

T/F. Financial institutions may sell credit default swaps on mortgages if they expect defaults on many mortgages

False

T/F. Mortgage lenders normally charge a higher initial interest rate on adjustable-rate mortgages than on fixed-rate mortgages

False

T/F. Mortgages are rarely sold in the secondary market

False

T/F. Non-US financial institutions never hold mortgages on US property

False

T/F. Speculators sell credit default swaps to benefit from the default of specific subprime mortgages

False

T/F. Strong economic growth tends to reduce the probability that the issuer of a mortgage will default on its debt payments and therefore tends to decrease mortgage prices.

False

T/F. the higher the level of equity invested by the borrower the higher the probability that the loan will default

False

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

Federal Deposit Insurance Corporation (FDIC)

___ was created in 1968 as a corporation that is wholly owned by the federal government. It guarantees payment on mortgages that meet specific criteria.

Ginnie Mae

Caps on mortgage rate fluctuations with adjustable-rate mortgages (ARMs) are typically

2% per year and 5% for the mortgage lifetime

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

Answers B and C are correct higher; longer lower; shorter

Bear Stearns commonly used ___ as collateral when borrowing short-term funds, but its funding was cut off because prospective creditors questioned the quality of the collateral

Mortgages

Lehman Brothers commonly used ___ as collateral when borrowing short-term funds, but its funding was cut off because prospective creditors questioned the quality of the collateral

Mortgages

T/F. A balloon-payment mortgage requires interest payments for a 3 to 5 year period. At the end of this period, full payment of the principal (the balloon payment) is required.

True

T/F. An increase in either the risk-free rate or the risk premium on a fixed-rate mortgage results in a higher required rate of return when investing in the mortgage and therefore causes the mortgage price to decrease.

True

T/F. Financial institutions may purchase credit default swaps on mortgages if they expect defaults on many mortgages

True

T/F. Mortgage companies, commercial banks, and savings institutions are the primary originators of mortgages.

True

T/F. Mortgage-backed securities are commonly contained within collateralized debt obligations

True

T/F. Regardless of what happens to market interest rates, most adjustable-rate mortgages (ARMs) specify a maximum allowable fluctuation in the mortgage rate per year and over the mortgage life

True

T/F. Some adjustable-rate mortgages (ARMs) contain an option clause that allows mortgage holders to switch to a fixed-rate mortgage within a specified period.

True

T/F. The valuation of mortgage-backed securities is difficult because of limited transparency

True

T/F. a financial institution may service a mortgage even after selling it

True

T/F. borrowers who have a lower level of income relative to the periodic loan payment are more likely to default on their mortgages

True

T/F. the secondary mortgage market accommodates originators of mortgages who desire to sell their mortgages before maturity.

True

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

Weak; decrease; increase

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; lower

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

growing-equity mortgage

An adjustable-rate mortgage increases interest rate risk for the ___, but reduces interest rate risk for the ____.

borrower; originator

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

The difference between the 30 year mortgage rate and the 30 year Treasury bond rate is primarily attributable to

credit risk

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

economic conditions

A ___ mortgage allows borrowers to initially make small payments on the mortgage, which are then increased on a graduated basis over the first 5 to 10 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 mortgage