FI 301 Chapter 9

(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

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

Specifies: A) whether the mortgage is federally insured. B) the amount of the loan. C) whether the interest rate is fixed or adjustable. D) the maturity.

Commercial banks and savings institutions are the primary originators of mortgages.

True

The majority of mortgage debt is on one- to four-family properties

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

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 schedule of monthly mortgage payments;

interest payments exceed principal payments early on

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

prepayment

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

publicly issued pass-through securities (pips)

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 folling is not a guarantor of federally insured mortgages?

the U.S. Treasury

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

"Securitization" refers to the private insurance of conventional mortgages.

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.

False

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

originate mortgages

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

a high degree of interest rate 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

Rates for adjustable-rate mortgages are commonly tied to the:

average treasury bill rate over the previous year

a mortgage which requires interest payments for a three to five year period, then full payment of principal, is a(n):

balloon payment mortgage

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

balloon-payment mortgages

_______ 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

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

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

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

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

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

weak; decrease; increase