FIN 370 Chapter 11

A. Residential (1-4 family)

1. Total mortgage debt outstanding as of the third quarter of 2011 approached $13.6 trillion. Which of the following types of mortgage loans accounts for the greatest percentage of mortgage debt outstanding? A. Residential (1-4 family) B. Apartment (multifamily) C. Commercial D. Farm

B. Government National Mortgage Association (Ginnie Mae)

10. In the late 1960's, 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? A. Federal National Mortgage Association (Fannie Mae) B. Government National Mortgage Association (Ginnie Mae) C. Federal Home Loan Mortgage Corporation (Freddie Mac) D. Federal Agricultural Mortgage Corporation (Farmer Mac)

C. conduits

11. 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: A. thrifts B. credit unions C. conduits D. automated underwriters

D. loan underwriting

8. Throughout the process of originating and selling mortgages, mortgage companies face a number of risks. Therefore, it is important for a lending institution to evaluate the risks of mortgage loan default through a process commonly referred to as: A. mortgage fallout B. loan servicing C. warehousing D. loan underwriting

A. Fannie Mae lends money directly to homebuyers

12. The Federal National Mortgage Association (Fannie Mae) was originally established to provide a secondary market for FHA-insured and VA-guaranteed loans. All of the following statements regarding Fannie Mae are true EXCEPT: A. Fannie Mae lends money directly to homebuyers B. Fannie Mae was once a private, self-supporting company with publicly traded stock that has now been placed into conservatorship by the United States government following the mortgage crisis of 2007-2008. C. Fannie Mae fully guarantees timely payment of interest and principal to investors. D. Fannie Mae is authorized to buy both conventional home loans and government-sponsored residential mortgages.

D. Nonconforming Conventional loan securitization

13. In the modern framework of home mortgage lending, there are four channels by which first mortgage home loans are created. Within which of the following channels would you typically find a Wall Street investment bank obtaining loans, pooling loans, and creating a senior-subordinate security structure? A. Traditional direct (portfolio) lending B. FHA/VA loan securitization C. Conforming conventional loan securitization D. Nonconforming Conventional loan securitization

C. Capacity

14. 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?" A. Collateral B. Creditworthiness C. Capacity D. Capability

C. Loan servicing

15. 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? A. Loan commitment B. Loan funding C. Loan servicing D. Loan sales

A. Standby forward commitment

16. Despite the risks that are inherent in the mortgage lending process, mortgage bankers have various tools at their disposal to hedge risk exposure. For example, since mortgage bankers know that only part of the loan commitments that they issue will be taken down by borrowers, they can purchase the right to sell a certain dollar amount of a certain loan type in the secondary market through what is commonly referred to as a: A. Standby forward commitment B. Mortgage pipeline C. Conduit D. Collateral

B. Pipeline fallout risk.

17. 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? A. Interest rate risk. B. Pipeline fallout risk. C. Default risk. D. Liquidity risk.

C. 44%

18. The development of Fannie Mae and Freddie Mac established the framework for a liquid secondary market for residential mortgages. In 2010, the share of all residential mortgage loans owned or securitized by Fannie Mae and Freddie Mac approached approximately: A. 5% B. 16% C. 44% D. 76%

C. Subprime mortgage loan

19. 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 percent financing, or who cannot document their income? A. Conventional prime home loan B. Affordable housing loan C. Subprime mortgage loan D. Bridge loan

B. Marketable U.S. government bonds, residential mortgage debt, corporate bonds, consumer debt

2. To put into perspective the amount of residential mortgage debt outstanding, it is useful to compare this market to other prominent sources of available debt. Listing the issuer with the largest amount of debt outstanding first, which of the following choices best depicts the relative rank ordering amongst the major sources of outstanding debt in the U.S. as of the end of 2011? A. Residential mortgage debt, marketable U.S. government bonds, corporate bonds, consumer debt B. Marketable U.S. government bonds, residential mortgage debt, corporate bonds, consumer debt C. Corporate bonds, marketable U.S. government bonds, residential mortgage debt, consumer debt D. Consumer debt, residential mortgage debt, marketable U.S. government bonds, corporate bonds

A. Collateral

20. 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: A. Collateral B. Creditworthiness C. Capacity D. Capability

C. 660

21. In analyzing a borrower's credit worthiness, the lender will typically examine the borrower's FICO score (a product developed by the Fair Isaac Corporation). High quality (prime) borrowers are those with a credit score above: A. 350 B. 620 C. 660 D. 850

A. The marginal cost per loan underwritten using the automated process is greater than the case of traditional underwriting.

22. The traditional approach to loan underwriting has virtually been replaced by an automated underwriting process that involves a statistically derived equation to determine the level of default risk associated with a loan application. All of the following statements regarding the automated underwriting process are true EXCEPT: A. The marginal cost per loan underwritten using the automated process is greater than the case of traditional underwriting. B. The time taken to approve a loan using the automated process is considerably shorter than the case of traditional underwriting C. The success in identifying risky loans is higher using the automated process than is the case with traditional underwriting D. Automated underwriting has made home ownership available to households for whom it previously was inaccessible.

A. $72.92

23. Loan servicing includes a number of responsibilities such as collecting monthly mortgage payments from the borrower, remitting principal and interest payments to investors, ensuring sufficient escrow payments are being made by the borrower, and managing default if it should arise. In exchange for these services, mortgage bankers receive a fee. If the outstanding loan balance is $250,000 and the annual servicing fee is 0.35%, what is the monthly fee for servicing the loan? A. $72.92 B. $729.17 C. $875.00 D. $8,750.00

C. 44.4%

24. In ascertaining whether a borrower has the ability to pay off his loan over time, a mortgage bank may rely on calculating a total debt ratio as part of its underwriting process. Utilizing the following information, calculate the total debt ratio. Monthly principal and interest on mortgage loan: $635, Monthly Tax and insurance payments into escrow: $125, Monthly Car lease payment (lease term is 3 years): $350, Gross monthly income: $2,500 A. 25.4% B. 30.4% C. 44.4% D. 53.2%

D. $1177

25. Suppose an institution has purchased a $250,000 mortgage loan from the loan originator and wishes to create a mortgage pass-through security. In doing so, this institution will generate revenue by charging a servicing fee of 35 basis points. If the monthly mortgage payment on the loan is $1,250, how much income is passed through to the investor in the mortgage pass through each month (rounded to the nearest dollar)? A. $73 B. $375 C. $875 D. $1177

B. 30.4%

26. Utilizing 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 A. 25.4% B. 30.4% C. 44.4% D. 53.2%

B. Disintermediation

3. In the early 1970's, 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: A. Deregulation B. Disintermediation C. Warehousing D. Underwriting

B. Financial Institutions Reform, Recovery, and Enforcement Act

4. 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? A. Depository Institutions Deregulation and Monetary Control Act B. Financial Institutions Reform, Recovery, and Enforcement Act C. Secure and Fair Enforcement for Mortgage Licensing Act D. Riegle Community Development and Regulatory Improvement Act

C. Warehousing

5. In addition to providing home mortgages, large commercial banks have specialized in providing short-term funds to mortgage banking companies in order to enable them to originate mortgage loans and hold the loans until the mortgage banking company can sell them in the secondary market. This type of financing is commonly referred to as: A. Mortgage pipeline B. Loan servicing C. Warehousing D. Loan underwriting

A. Mortgage banker

6. The emergence of mortgage securities propelled the development of mortgage companies, an entity significantly different from the thrifts and banks that previously dominated the mortgage landscape. Which of the following parties is responsible for providing mortgage origination services and initial funding within this new framework? A. Mortgage banker B. Mortgage broker C. Portfolio lender D. Security analyst

A. mortgage pipeline

7. 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: A. mortgage pipeline B. mortgage note C. mortgage fallout D. mortgage term

C. 85%

9. When a mortgage is used as collateral for the issuance of a mortgage-backed security (MBS), the underlying mortgage is said to be "securitized." As of the end of 2010, approximately what percentage of residential mortgage loans in the U.S. was being sold into the secondary market and being used as collateral for the issuance of MBS? A. 25% B. 40% C. 85% D. 100%