4617 Final

1. Depository institutions have followed and originate-to-lend model of loan origination only since the Financial Services Modernization Act of 1999.

FALSE

10. GNMA will sponsor any pool of loans regardless of the size of each individual loan in the pool.

FALSE

46. An interest-only (IO) mortgage pass-through strip has a claim on the present value of interest payments on the mortgages in a GNMA pool.

TRUE

48. At market rates substantially below the mortgage coupon rate of an interest-only (IO) mortgage- backed strip the prepayment effect will dominate the discount effect resulting in a decrease in the price of the IO strip.

TRUE

83. Why are the class C bonds highly attractive to insurance companies and pension funds? A. Because of their ability to offer perfect prepayment protection. B. Because of the shortest average life with a minimum of prepayment protection. C. Because of their long expected duration. D. Because they are basically zero coupon bonds and hence carry a minimum amount of risk. E. Answers A and D only

. C

55. Which of the following is a primitive form of asset securitization? A. Loan sales. B. Pass-through security.C. Collateralized mortgage obligation. D. Mortgage-backed bond.E. Timing insurance.

A

58. Which type of loans are securitized most often? A. Residential mortgages. B. Credit card loans.C. Auto loans.D. Student loans.E. Commercial and industrial (C&I) loans.

A

9. GNMA is a privately-owned entity.

FALSE

57. A commercial bank operating under an originate-to-sell model is acting most like A. an asset transformer. B. an asset broker.C. a portfolio lender.D. an asset accumulator. E. an investment bank.

b

38. Mortgage pools that are assumed to prepay at a rate of speed that is more rapid than the PSA model would indicate are said to prepay at less than 100 percent PSA behavior because the mortgage life and balance will exist for a longer time.

FALSE

4. When a Special Purpose Vehicle (SPV) creates asset-backed securities the SPV retains ownership of the original assets.

FALSE

43. Most mortgage-backed bond issues conducted by depository institutions are under-collateralized.

FALSE

47. The value of an interest-only (IO) mortgage-backed strip is not sensitive to changes in current market interest rates.

FALSE

52. The discount effect and the prepayment effect are negatively correlated in their impact on the value of a principal-only (PO) mortgage-backed strip security.

FALSE

53. Certificates of Amortizing Revolving Debts are asset-backed securities that have a claim on automobile installment loans.

FALSE

7. Despite the complexity of measuring the risk of asset-backed securities; credit rating agencies continued to use their own measures to quantify risks involved.

FALSE

30. All else equal once a mortgage pool has aged; prior prepayments of mortgages in the pool have no bearing on the current value of the pool or the future prepayment rates of mortgages left in the pool.

FALSE

32. It is advantageous for the residential mortgage holder to refinance because market interest rates on new mortgages are less than interest rates on existing mortgages.

FALSE

34. A bad news effect of increased mortgage prepayments on a mortgage pool caused by decreasing market interest rates includes a reduction in the discount rate on the mortgage cash flow.

FALSE

35. A good news effect of increased mortgage prepayments on a mortgage pool caused by decreasing market interest rates includes the receipt of fewer scheduled interest payments.

FALSE

37. The weighted-average life of a loan is greater than the duration of the loan.

FALSE

50. A principal only (PO) mortgage-backed strip is attractive to investors who wish to speculate about decreasing interest rates.

TRUE

51. A principal-only (PO) mortgage pass-through strip security is attractive to investors that wish to Increase the interest rate sensitivity of their portfolio.

TRUE

6. Investors in a Structured Investment Vehicle (SIV) have no direct right to the cash flows on the underlying portfolio of the SIV.

TRUE

8. GNMA helps create pass-throughs by providing timing insurance.

TRUE

3. Securitization increases the FI's capital requirements.

FALSE

70. Servicing a pass-through security refers to A. an FI processing of all payments. B. an FI provision of clearing services to set up the pass-through. C. broker/dealer services provided by the FI to the ultimate holders of the pass-through. D. guarantee by the FI of all principal and interest payments. E. an FI provision of liquidity services to the ultimate holders of the pass-through.

A

72. Investors in mortgage-backed pass-through securities are exposed to a variety of risks. Compared to other fixed-income securities the most unique of these risks is A. prepayment risk B. default risk C. credit risk D. interest rate risk E. liquidity risk

A

82. In regard to a CMO which of the following have the shortest average life with a minimum of prepayment protection? A. Class A bonds. B. Class B bonds. C. Class C bonds. D. Class Z bonds. E. Class R bonds.

A

89. Why do garbage class bonds often have a negative duration? A. The value of the returns in this bond class increases when interest rates increase. B. It gives the rights to collateralization. C. Bond values fall with interest rate increases. D. It gives rights to reinvestment income on the cash flows in the CMO trust. E. Significant risk premium required by the uninsured depositors.

A

54. The packaging of loans into asset pools and then selling portions of the pool to investors is known as : A. security creation. B. securitization. C. loan transfer. D. loan collateralization. E. mutual fund management.

B

62. Which of the following government agencies or government-sponsored enterprises are NOT directly involved in the creation of mortgage-backed pass-through securities? A. Government National Mortgage Association.B. Farmers Home Administration.C. Federal National Mortgage Association. D. Federal Home Loan Mortgage Corporation.

B

71. The characteristics of a CMO securities issue include the following EXCEPT A. the tranches will have different coupon rates. B. the CMO securities are insured separately from the GNMA pass-through securities. C. the principal payments are made totally to the earliest remaining tranche. D. GNMA pass-through securities are used as collateral in a trust to support the CMOs. E. the CMO securities are split into different tranches or groupings.

B

74. Mortgage-backed bonds (MBB) differ from pass-throughs and CMOs in which of the following ways? A. The MBB bondholders have a junior claim to assets of the FI. B. There is no direct link between the cash flow on the mortgages backing the bond and the interest and principal payments on the MBB. C. The assets backing a MBB issue are normally removed from the balance sheet of the FI. D. Tranches of a MBB are treated equally with respect to prepayments on mortgages backing the bond issue.E. None of the above.

B

75. A claim to the present value of the interest payments made by the mortgage holders in a GNMA pool is A. a CARS. B. an IO strip. C. a CARD. D. a PO strip. E. a prepayment claim.

B

76. Which of the following is an example of a negative duration asset that is valuable as a portfolio- hedging device for an FI manager when included with regular bonds whose price-yield curves show the normal inverse relationship? A. PO strip. B. IO strip. C. Class B bonds. D. Class Z bonds. E. Class A bonds.

B

80. Which of the following is true concerning an assumable mortgage? A. The aggregate percent of the mortgage pool that has been prepaid prior to the month under consideration. B. The mortgage contract is transferred from the seller to the buyer of a house. C. The required interest spread of a pass-through security over a treasury when prepayment risk is taken into account. D. A mortgage-backed bond issued in multiple classes or tranches. E. Bonds collateralized by a pool of assets.

B

56. Which of the following is not accomplished by securitization of assets? A. Increases the liquidity of assets.B. Provides a new source of funds.C. Increases the costs of monitoring. D. Decreases the duration of assets. E. Decreases the costs of regulation.

C

60. As of 2009 the amount of mortgage-backed securities outstanding was approximately: A. $2.9 trillion. B. $5.1 trillion. C. $7.5 trillion. D. $11.0 trillion. E. $15.0 trillion.

C

63. The Government National Mortgage Association A. is a private corporation owned by shareholders.B. purchases pools of mortgages originated by FIs.C. provides timing insurance to investors in mortgage-backed securities. D. only approves conventional and FHA/VA insured mortgages. E. was the first agency to securitize residential mortgages.

C

73. Which of the following is NOT a factor that may cause the prepayment risk on a pool of mortgages to differ from the PSA's assumed pattern? A. The age of the mortgage pool. B. Geographic location. C. Seasons in the year in which the mortgage was originated. D. Full or partial amortization of the payments. E. Assumability of mortgages in the pool.

C

79. Which of the following best explains the term burn-out factor? A. The percent of mortgage contract that is transferred from the seller to the buyer of a house. B. The required interest spread of a pass-through security over a treasury when prepayment risk is taken into account. C. The aggregate percent of the mortgage pool that has been prepaid prior to the month under Consideration. D. A mortgage-backed bond issued in multiple classes or tranches. E. Bonds collateralized by a pool of assets.

C

59. Which of the following assets have not been securitized by FIs? A. Mortgages. B. Credit card receivables.C. Auto loans.D. Debts of Lesser Developed Countries (LCD debt). E. Student loans.

D

81. Why are the regular GNMA pass-throughs not very attractive to insurance companies and pension Funds seeking long-term duration assets to match their long-term duration liabilities? A. Because of their short expected duration. B. Because these bonds have the shortest average life with a maximum of prepayment protection. C. Because they are zero coupon bonds and hence carry maximum amount of risk. D. Because of their failures to offer prepayment protection. E. Bondholders receive the promised coupon and principal payments but are not entitled to accrued interest payments.

D

86. This is an accrual class of a CMO that makes a payment to bondholders only when preceding CMO classes have been retired. A. Class A bonds.B. Class B bonds.C. Class C bonds. D. Class Z bonds.E. None of the above.

D

Which of the following factors occurred in the early 2000s and created concerns about the ability of Fannie Mae and Freddie Mac to manage their portfolios of assets? A. Fannie Mae miscalculated the value of its mortgages that created a restatement of its stockholder equity. B. Both agencies overcharged lenders for services they provided. C. Fannie Mae operated for some time with a sharp increase in interest rate risk on its balance sheet. D. All of the above. E. Answers B and C only.

D

11. FNMA supports only those pools of mortgages that comprise mortgage loans whose default or credit risk is insured by one of three government agencies.

FALSE

13. FNMA does not hold the mortgages it purchases on its balance sheet thereby transferring credit and default risk to investors purchasing its securities.

FALSE

14. The three government agencies that sponsor the creation of mortgage-backed; pass through securities are: GNMA, FNMA, and FDIC.

FALSE

18. GNMA is more active in the market for mortgage pass-through securities than either FNMA or FHLMC.

FALSE

20. The securities that form a GNMA pass-through are U.S. Treasury bonds; bills;and notes.

FALSE

21. All tranches in a collateralized mortgage obligation (CMO) have the same prepayment risk exposure.

FALSE

24. Investors in GNMA pass-through securities are exposed to the risk that the originating bank may fail and the risk that the trustee may mismanage monthly interest and principal payments collected.

FALSE

61. All else equal advantages of a DI operating as an asset broker in regard to mortgages includes all of the following EXCEPT A. lower regulatory taxes.B. increased fee-based income.C. increased liquidity.D. decreased asset and liability duration mismatch. E. increased capital requirements.

E

65. Which of the following is an incentive to securitize mortgage assets? A. To reduce the regulatory tax burden on the FI. B. To adjust the gap exposure of the FI. C. To improve the liquidity of the FI. D. To generate non-interest sensitive fee income. E. All of the above.

E

69. Which of the following is the principle source of prepayment risk on a typical FNMA mortgage- backed pass-through security? A. Refinancing. B. Default risk. C. Housing turnover. D. Non-assumable mortgages. E. All of the above

E

88. Which of the following is NOT true of an R class CMO issue? A. It is treated as "garbage class." B. It is a high-risk investment class. C. It gives the investor the rights to the over-collateralization and reinvestment income on the cash flows in the CMO trust. D. Returns increase when interest rates increase. E. It has a positive duration.

E

12. Historically FNMA has had a secured line of credit with the U.S. Treasury.

TRUE

16. FNMA securitizes conventional mortgage loans as well as FHA/VA insured loans.

TRUE

17. Individual mortgage loans in a pool sponsored by FNMA or FHLMC must be non-assumable of the property is sold.

TRUE

19. Unlike GNMA FNMA will securitize conventional mortgages issued by depository institutions.

TRUE

2. The availability of a liquid secondary market for asset-backed securities provided an incentive for FIs to follow an originate-to-lend strategy of loan origination.

TRUE

22. GNMA pass-throughs can assist an FI in resolving duration mismatch and illiquidity risk problems.

TRUE

23. GNMA pass-through bondholders can be protected against default risk by FHA/VA housing insurance.

TRUE

26. Full amortization of a thirty-year mortgage means that monthly payments are equal and include both principal and interest

TRUE

27. Prepayment risk means that realized cash flows on pass-through securities may be more than expected cash flows.

TRUE

28. The ability to refinance a mortgage with no prepayment penalty gives the borrower a long-term put option on interest rates.

TRUE

29. One advantage of asset securitization to a bank is the ability to originate new assets before the original assets have matured.

TRUE

31. One cause of residential mortgage prepayment risk is the sale of the mortgaged property.

TRUE

33. The call option held by the residential mortgage holder is in the money when market interest rates are less than the interest rate on an existing mortgage.

TRUE

36. Prepayment models are attempts by professional mortgage portfolio managers to estimate the rate of prepayment on given mortgage pools.

TRUE

39. Early prepayments on mortgages backing a CMO are normally allocated to the earliest existing tranche maturity.

TRUE

40. CMOs are typically created from existing GNMA pass-through securities that are held in trust.

TRUE

41. The creation and sale of CMOs is based (at least in part) on the ability to segment the market for pass- through security products.

TRUE

42. Mortgage-backed bonds are a form of on-balance-sheet securitization.

TRUE

44. Mortgage-backed bonds differ from CMOs and pass-through securities in that there is no direct link between the cash flows on the mortgages and the interest and principal payments on the bonds.

TRUE

45. A mortgage pass-through strip security is a special type of collateralized mortgage obligation (CMO).

TRUE

49. An interest-only (IO) mortgage-backed strip is a rare example of a negative duration asset.

TRUE

5. The life of a Structured Investment Vehicle (SIV) is not tied to any particular asset class that it is responsible for securitizing.

TRUE

67. Which of the following are functions of GNMA? A. Engaging in swap transactions where it swaps mortgage-backed securities with an FI for original mortgages. B. Sponsors mortgage-backed securities programs by FIs such as banks; thrifts;and mortgage bankers. C. Acts as a guarantor to investors in mortgage-backed securities regarding the timely pass-through of principal and interest payments on their sponsored bonds. D. All of the above. E. Answers B and C only.

e