Chapter 3 Cummulative Quiz

During the height of the housing bubble, the government-sponsored enterprises started buying what type of loans? A-minus loans All subprime loans Automobile loans Home equity lines of credit

Correct Answer: A Explanation: Fannie Mae and Freddie Mac began buying A-minus or Alt-A loans, considered the top layer of subprime loans.

A lender keeps a loan in portfolio if it: retains the loan and receives payments from the borrower sells the loan to a private investor sells the loan to a secondary market entity sells the loan but continues to service it on behalf of the buyer

Correct Answer: A Explanation: If a lender does not sell a loan in the secondary market but instead keeps it and receives payments, it is said to keep the loan in portfolio.

This GSE was formed to assist savings and loan associations by allowing them to participate in the secondary market. FHLMC FNMA FHLBB OFHEO

Correct Answer: A Explanation: The Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) was created with the intent of helping savings and loans sell conventional loans in the secondary market.

The phenomenon of _____ occurs when investors remove funds from savings accounts and place them in competing investments that may offer higher returns. disintegration disintermediation dislocation remediation

Correct Answer: B Explanation: Disintermediation occurs when investors move money out of savings accounts into more lucrative investments such as stocks or bonds.

A GSE may do all of the following except: buy loans originate loans package loans as securities sell loans

Correct Answer: B Explanation: GSEs do not originate loans; this occurs in the primary market.

Which newly-created regulatory agency placed Fannie Mae and Freddie Mac into conservatorship in 2008? Federal Deposit Insurance Corporation Federal Housing Finance Agency Government National Mortgage Association Office of Thrift Supervision

Correct Answer: B Explanation: The Federal Housing Finance Agency was formed in the summer of 2008 to regulate the government-sponsored enterprises. Several months later, it was forced to place them both into conservatorship.

This was created in 1938 in order to create a secondary market for FHA-insured loans; it gradually expanded to include VA-guaranteed and conventional loans as well. Billie Gene Fannie Mae Freddie Mac Ginnie Mae

Correct Answer: B Explanation: The Federal National Mortgage Association (FNMA or Fannie Mae) was formed during the Depression to create a secondary market for FHA-insured loans. It now also buys VA and conventional loans.

Which of the following is a GSE? Federal Deposit Insurance Corporation Federal National Mortgage Association Federal Reserve Bank of San Francisco Western Federal Savings and Loan

Correct Answer: B Explanation: The Federal National Mortgage Association (better known as Fannie Mae) is a GSE, which purchases loans from primary market lenders.

Reliable Savings Bank accepts deposits and originates loans for the purchase of homes. Reliable operates in the: money market primary market secondary market tertiary market

Correct Answer: B Explanation: The primary mortgage market is composed of lenders, many of whom accept deposits and make loans only in their local community.

The economy is booming in Happyville and the population is growing. A potential problem for local lenders might be that: fewer people will be able to afford to buy houses because of increasing prices residents will save more, meaning that the lenders may have surplus deposited funds there aren't enough funds on deposit to meet the increased demand for new loans there isn't enough demand for loans, meaning deposited funds will go uninvested

Correct Answer: C Explanation: A booming local economy means that people will spend more and that more people will want to buy houses in the area. Local lenders may face the problem of not having enough funds on deposit to meet demand for new loans.

Which of the following is NOT an advantage that mortgage-backed securities have over the direct purchase of mortgage loans? Securities are guaranteed by the issuing entity Securities are more liquid than mortgages Securities do not include servicing fees Securities may be purchased in smaller denominations

Correct Answer: C Explanation: An investor who purchases mortgage-backed securities will have servicing fees deducted from the payments that he receives, in order to compensate the lender who services the loan.

All of the following are considered to be beneficial effects of the secondary market entities, except: increased home ownership rates lower mortgage interest rates more accurate prediction of borrowers' likelihood of default quicker and less expensive loan processing

Correct Answer: C Explanation: Many mortgage industry analysts credit the secondary market with increasing home ownership rates, lowering interest rates, and cutting down the time and cost associated with obtaining a loan, as well as other benefits. Better prediction of default is associated more with new credit scoring techniques.

One important result of the underwriting standards imposed in the secondary market is that: fewer loans are sold because of the strict uniform underwriting standards keeping loans in portfolio has become more prevalent lenders became more comfortable offering products like ARMs and 15-year fixed-rate mortgages more lenders have begun operating nationwide, instead of just in local markets

Correct Answer: C Explanation: Once GSEs set underwriting standards that allowed for new products like ARMs and 15-year fixed-rate mortgages, those types of financing became commonly available in local primary markets, since lenders were assured they would be able to sell them in the secondary market. (It's true that more lenders operate nationwide now, but that has to do with changes in banking regulations.)

A private investor purchases real estate loans from lenders throughout the country and pools them together to serve as collateral for mortgage-backed securities. This occurs in the: money market primary market secondary market tertiary market

Correct Answer: C Explanation: The secondary market is where loans are bought from local primary market lenders and sold to investors. This may be conducted by either government-sponsored enterprises or private investors.

The goals of Fannie Mae and Freddie Mac include providing programs to help with affordable: rental housing home purchases super jumbo loans Both A and B

Correct Answer: D Explanation: HUD sets affordable housing goals for Fannie Mae and Freddie Mac to implement with their programs.

An investment bank purchases mortgage loans and sells mortgage-backed securities to investors. These would be known as: commercial securities convertible securities nonconforming securities private-label securities

Correct Answer: D Explanation: Mortgage-backed securities issued by private firms (such as investment banks) are known as private-label securities.

A mortgage-backed security backed by pools of conventional loans would not be available from: a private investment bank Fannie Mae Freddie Mac Ginnie Mae

Correct Answer: D Explanation: The Government National Mortgage Association (GNMA or Ginnie Mae) doesn't offer mortgage-backed securities, only guarantees them (and is limited to FHA and VA mortgage loan securities).

What important function does the secondary market serve? It insures loans made by primary market lenders, allowing lenders to make riskier loans It makes more funds available for mortgage loans It stabilizes local markets by moderating the effects of real estate cycles Both B and C

Correct Answer: D Explanation: The secondary market encourages home ownership by increasing the flow of funds available for mortgage lending, and it reduces the effect of local real estate cycles by creating a national marketplace for buying and selling loans.

Which entity or entities were, until recently, considered not to be backed by the "full faith and credit" of the federal government? Fannie Mae Freddie Mac FHA Both A and B

Correct Answer: D Explanation: As part of its conservatorship actions, the Federal Housing Finance Agency implemented a federal guaranty for securities issued by Fannie Mae and Freddie Mac. Prior to this, they did not have a federal guaranty, although many investors considered federal backing to be implicit.

This secondary market entity is a part of the Department of Housing and Urban Development, rather than a government-sponsored enterprise. Federal Home Loan Mortgage Corporation Federal Housing Administration Federal National Mortgage Association Government National Mortgage Association

Correct Answer: D Explanation: The Government National Mortgage Association (GNMA or Ginnie Mae) is a government-owned corporation and an agency within HUD. Fannie Mae and Freddie Mac, by contrast, are government-sponsored enterprises that operate with HUD oversight.