Ch.11

Using the following information, calculate the housing expense ratio: monthly principal and interest on mortgage loan: $635; monthly tax and insurance payments into escrow: $125; gross monthly income: $2,500.

30.4% (635+125)/2500

When a mortgage is used as collateral for the issuance of a mortgage-backed security (MBS), the underlying mortgage is said to be securitized. Approximately what percentage of conventional conforming and FHA or VA loans in the United States are being sold into the secondary market and being used as collateral for the issuance of MBS?

90%

In 1989, Congress took major steps to establish depository institution accountability by requiring these institutions to hold more capital as they take on riskier assets. Which of the following congressional acts imposed these capital standards on depository institutions?

Financial Institutions Reform, Recovery, and Enforcement Act

In the late 1960s, Congress created a number of agencies designed to address a struggling secondary market for residential mortgages. Which of the following organizations was developed primarily to guarantee mortgage-backed securities based on pools of FHA, VA, and Rural Housing Service loans, rather than issue, buy, or sell mortgages?

Government National Mortgage Association (Ginnie Mae)

Let's suppose that a lender has established a 90% loan-to-value ratio cutoff as one of its primary underwriting criteria. If a borrower is willing to make a down payment of $125,000 on a home recently appraised at $550,000, which of the following best describes the lender's decision on whether or not to approve the loan along this dimension?

The lender approves the loan because the LTV ratio is less than 90%. Current LTV = (550 ,000 - 125,000)/550,000 Current LTV = 77.27% As current LTV is lower than maximum loan to value, so lender will approve the loan.

The Dodd-Frank Act ushered in a new standard for home mortgage underwriting. Which of the following standards is now required of any lender when underwriting a home loan?

ability-to-repay standard

Traditional home mortgage underwriting is said to rest on three elements, the "three C's." The housing expense ratio is one tool that lenders will use to address concerns associated with which of the "three C's"?

capacity

Traditional home mortgage underwriting is said to rest on three elements, the "three C's." Recent research (e.g., Archer and Smith, 2011) has confirmed that the underwriting characteristic most strongly associated with default is

collateral

In the securitization process, mortgages are pooled together and cash flows are packaged into securities to be sold in the secondary market. Agencies and private companies that pool mortgages and sell mortgage-backed securities (MBS) are often referred to as

conduits

In the early 1970s, home mortgage lenders were predominantly depository institutions. By the end of the decade, the growth of deposits at these institutions became negative due to the emergence of more attractive investment opportunities such as money market funds. This change in the distribution chain of funds is more commonly referred to as

disintermediation

Suppose that a mortgage bank locked in an interest rate for a prospective borrower at 8.5%. However, prior to the loan closing, the market mortgage rate falls to 7.5%. In this scenario, the mortgage banker would be most concerned with which of the following risks?

fallout risk

When the contract rate at closing is less than the current market rate (i.e., interest rates have increased since the time of the loan commitment), the mortgage banker will have to sell the newly originated loan at a discount. This scenario best depicts the mortgage banker's exposure to which of the following risks?

interest rate risk

Recently, mortgage banking has become the natural method for doing mortgage lending. Within the mortgage lending process, which of the following roles serves as the primary revenue source for mortgage banks?

loan servicing

Mortgage banks typically will attempt to sell loans as quickly as possible after they are originated by either issuing mortgage securities or selling the loan to an intermediary that will subsequently sell the loan in the secondary market. The period between loan commitment and loan sale is referred to as the

mortgage pipeline

Despite many innovations in the lending process that made mortgage loans more accessible and affordable to the general public, many potential borrowers faced considerable barriers in qualifying for a loan and making a down payment. Which of the following types of loans was designed for a borrower with weak credit, those who seek 100% financing, or who cannot document their income?

subprime mortgage loan