Ch 14 The Mortgage Markets
Growing-equity mortgage (GEM)
-initial payment increases each year; loan amortizes in LESS THAN 30 years
collateralized mortgage obligation (CMO)
-structured MBS where investor "tranches" have different rights to different sets of cash flows -securities classified by when prepayment is likely to occur. Differ from traditional MBS in that they are offered in different maturity groups
The share of the mortgage market held by commercial banks is approximately 30 percent. 5 percent. 50 percent. 15 percent.
30 percent
Typically, discount points should not be paid if the borrower will pay off the loan in ________ years or less. 5 15 10 20
5
Which of the following protects the mortgage lender's right to sell property if the underlying loan defaults? Borrower qualification A lien Private mortgage insurance Amortization A down payment
A lien
(I) ARMs offer lower initial rates and the rate may fall during the life of the loan. (II) Conventional mortgages do not allow a borrower to take advantage of falling interest rates. A. (I) is true, (II) is false. B. (I) is false, (II) is true. C. Both are true. D. Both are false.
A. (I) is true, (II) is false
Which of the following is true of mortgage interest rates? A. In exchange for points, lenders reduce interest rates on mortgage loans. B. Longer-term mortgages have lower interest rates than shorter-term mortgages. C. Mortgage rates are lower than Treasury bond rates because of the tax deductibility of mortgage interest rates. D. All of the above are true. E. Only A and B of the above are true.
A. In exchange for points, lenders reduce interest rates on mortgage loans.
Which of the following is true of mortgage interest rates? A. Longer-term mortgages have higher interest rates than shorter-term mortgages. B. Mortgage rates are closely tied to Treasury bond rates, but mortgage rates tend to stay below Treasury rates because mortgages are secured with collateral. C. Interest rates are higher on mortgage loans on which lenders charge points. D. All of the above are true. E. Only A and B of the above are true.
A. Longer-term mortgages have higher interest rates than shorter-term mortgages.
Retired people can live on the equity they have in their homes by using a A. RAM. B. GPM. C. SAM. D. GEM.
A. RAM.
Which of the following are useful for home buyers who expect their income to fall in the future? A. RAMs B. GPMs C. GEMs D. Only A and B are useful. E. Only A and C are useful.
A. RAMs
Which of the following terms are found in mortgage loan contracts to protect the lender from financial loss? Collateral Private mortgage insurance Down payment All of the above
All of the above
Which of the following are important ways in which mortgage markets differ from the stock and bond markets? Most mortgages are secured by real estate, whereas the majority of capital market borrowing is unsecured. The usual borrowers in the capital markets are government entities and businesses, whereas the usual borrowers in the mortgage markets are individuals. Because mortgages are made for different amounts and different maturities, developing a secondary market has been more difficult. All of the above are important differences. Only A and B of the above are important differences.
All of the above are important differences.
Which of the following are true of mortgages? Over 80 percent of mortgage loans finance residential home purchases. A borrower pays off a mortgage in a combination of principal and interest payments that result in full payment of the debt by maturity. A mortgage is a long-term loan secured by real estate. All of the above are true of mortgages. Only A and B of the above are true of mortgages.
All of the above are true of mortgages.
(I) Conventional mortgages are originated by private lending institutions, and FHA or VA loans are originated by the government. (II) Conventional mortgages are insured by private companies, and FHA or VA loans are insured by the government. A. (I) is true, (II) false. B. (I) is false, (II) true. C. Both are true. D. Both are false.
B. (I) is false, (II) true
During the early years of an amortizing mortgage loan, the lender applies A) most of the monthly payment to the outstanding principal balance. B) all of the monthly payment to the outstanding principal balance. C) most of the monthly payment to interest on the loan. D) all of the monthly payment to interest on the loan. E) the monthly payment equally to interest on the loan and the outstanding principal balance.
C) most of the monthly payment to interest on the loan.
Between 2000 and 2005, home prices increased an average of ________ per year. A. 2% B. 12% C. 8% D. 4%
C. 8%
From 2000 to 2005, housing prices increased, on average, by over 40%. This run up in prices was caused by A. an increase in subprime loans, which increased demand or new and existing houses. B. speculators C. both A and B D. None of the above are correct
C. both A and B
The percentage of the total loan paid back immediately when a mortgage loan is obtained, which lowers the annual interest rate on the debt, is called A. collateral. B. down payment. C. discount points. D. loan terms.
C. discount points.
Growing-equity mortgages (GEMs) A. have such low payments in the first few years that the principal balance increases. B. offer borrowers payments that are initially lower than the payments on a conventional mortgage. C. help the borrower pay off the loan in a shorter time. D.do all of the above. E. do only A and B of the above.
C. help the borrower pay off the loan in a shorter time
Ginnie Mae A. insures qualifying mortgages. B. insures collateralized mortgage obligations. C. insures pass-through certificates. D. does only A and B. of the above. E. does only B and C of the above.
C. insures pass-through certificates.
The Federal Housing Administration (FHA) A. funds purchases of mortgages by selling bonds to the public. B. was set up to buy mortgages from thrifts so that these institutions could make more loans. C. provides insurance for certain mortgage contracts. D. does all of the above. E. does only A and B of the above.
C. provides insurance for certain mortgage contracts.
The share of the mortgage market held by savings and loans is approximately A) 50 percent. B) 40 percent. C) 20 percent. D) 10 percent
D) 10 percent
Which of the following are important ways in which mortgage markets differ from the stock and bond markets? A) The usual borrowers in the capital markets are government entities and businesses, whereas the usual borrowers in the mortgage markets are individuals. B) Most mortgages are secured by real estate, whereas the majority of capital market borrowing is unsecured. C) Because mortgages are made for different amounts and different maturities, developing a secondary market has been more difficult. D) All of the above are important differences. E) Only (A) and (B) of the above are important differences.
D) All of the above are important differences.
Which of the following are true of mortgages? A) A mortgage is a long-term loan secured by real estate. B) A borrower pays off a mortgage in a combination of principal and interest payments that result in full payment of the debt by maturity. C) Over 80 percent of mortgage loans finance residential home purchases. D) All of the above are true of mortgages. E) Only (A) and (B) of the above are true of mortgages.
D) All of the above are true of mortgages.
Which of the following are true of mortgages? A) Prior to the 1920s, U.S. banking legislation discouraged mortgage lending by banks. B) In the 1920s, most mortgages were balloon loans, which required the borrower to pay the entire loan amount after three to five years. C) Because mortgages are long-term loans secured by real estate, mortgage lenders tended to fail when land prices declined, as was often the case during economic recessions. D) All of the above are true. E) Only (A) and (B) of the above are true.
D) All of the above are true.
Which of the following is true of mortgage interest rates? A) Interest rates on mortgage loans are determined by three factors: current longterm markets rates, the term of the mortgage, and the number of discount points paid. B) Mortgage interest rates tend to track along with Treasury bond rates. C) The interest rate on 15-year mortgages is lower than the rate on 30-year mortgages, all else the same. D) All of the above are true. E) Only (A) and (B) of the above are true.
D) All of the above are true.
Which of the following are important ways in which mortgage markets differ from stock and bond markets? A) The usual borrowers in capital markets are government entities, whereas the usual borrowers in mortgage markets are small businesses. B) The usual borrowers in capital markets are government entities and large businesses, whereas the usual borrowers in mortgage markets are small businesses. C) The usual borrowers in capital markets are government entities and large businesses, whereas the usual borrowers in mortgage markets are small businesses and individuals. D) The usual borrowers in capital markets are businesses and government entities, whereas the usual borrowers in mortgage markets are individuals.
D) The usual borrowers in capital markets are businesses and government entities, whereas the usual borrowers in mortgage markets
What factors are used in determining a person's FICO score? A. Length of credit history B. Outstanding debt C. Past payment history D. All of the above
D. All of the above
Which of the following are true of mortgage interest rates? A. Mortgage interest rates tend to track along with Treasury bond rates. B. Interest rates on mortgage loans are determined by three factors: current long-term market rates, the term of the mortgage, and the number of discount points paid. C. The interest rate on 15-year mortgages is lower than the rate on 30-year mortgages, all else the same. D. All of the above are true. E. Only A and B of the above are true.
D. All of the above are true
A loan for borrowers who do not qualify for loans at the usual market rate of interest because of a poor credit rating or because the loan is larger than justified by their income is A. an insured mortgage. B. a securitized mortgage. C. a graduated-payment mortgage. D. a subprime mortgage.
D. a subprime mortgage.
The interest rate borrowers pay on their mortgages is determined by A. the number of discount points. B. current long-term market rates. C. the term. D. all of the above.
D. all of the above
During the early years of an amortizing mortgage loan, the lender applies A. all of the monthly payment to the outstanding principal balance. B. most of the monthly payment to the outstanding principal balance. C. all of the monthly payment to interest on the loan. D. most of the monthly payment to interest on the loan. E. the monthly payment equally to interest on the loan and the outstanding principal balance.
D. most of the monthly payment to interest on the loan.
During the last years of an amortizing mortgage loan, the lender applies A. the monthly payment equally to interest on the loan and the outstanding principal balance. B. all of the monthly payment to interest on the loan. C. all of the monthly payment to the outstanding principal balance. D. most of the monthly payment to the outstanding principal balance. E. most of the monthly payment to interest on the loan.
D. most of the monthly payment to the outstanding principal balance.
Which of the following reduces moral hazard for the mortgage borrower? Down payments Collateral Borrower qualifications Private mortgage insurance
Down payments
Which of the following are true of mortgages? A) A mortgage is a long-term loan secured by real estate. B) Borrowers pay off mortgages over time in some combination of principal and interest payments that result in full payment of the debt by maturity. C) Less than 65 percent of mortgage loans finance residential home purchases. D) All of the above are true of mortgages. E) Only (A) and (B) of the above are true of mortgages.
E) Only (A) and (B) of the above are true of mortgages.
The Federal National Mortgage Association (Fannie Mae) A. was set up to buy mortgages from thrifts so that these institutions could make more loans. B. funds purchases of mortgages by selling bonds to the public. C. provides insurance for certain mortgage contracts. D. does all of the above. E. does only A and B of the above.
E. does only A and B of the above.
________ issues participation certificates, and ________ provides federal insurance for participation certificates Freddie Mac; no one Ginnie Mae; Ginnie Mae Freddie Mac; Ginnie Mae Freddie Mac; Freddie Mac Ginnie Mae; Freddie Mac
Freddie Mac; no one
Which of the following is true of mortgage interest rates? In exchange for points, lenders reduce interest rates on mortgage loans. Longer-term mortgages have higher interest rates than shorter-term mortgages. Mortgage rates are lower than Treasury bond rates because of the tax deductibility of mortgage interest payments. All of the above are true. Only A and B of the above are true.
In exchange for points, lenders reduce interest rates on mortgage loans
Which of the following are true of mortgages? Borrowers pay off mortgages over time in some combination of principal and interest payments that result in full payment of the debt by maturity. A mortgage is a long-term loan secured by real estate. Less than 65 percent of mortgage loans finance residential home purchases. All of the above are true of mortgages. Only A and B of the above are true of mortgages.
Only A and B of the above are true of mortgages.
Which of the following are useful for home buyers who expect their income to rise in the future? GEMs RAMs GPMs Only A and B are useful. Only A and C are useful.
Only A and C are useful.
Which of the following are true of mortgages? Most mortgages during the 1920s and 1930s were balloon loans. The National Banking Act of 1863 rewarded banks that increased mortgage lending. More than 80 percent of mortgage loans finance residential home purchases. All of the above are true. Only A and C of the above are true.
Only A and C of the above are true.
Reverse annuity mortgage
RAMs are for retired people to live on the equity they have in their homes: increasing balance loan the borrower does not make payments against. When the borrower dies, the estate property is sold to retire the debt -lender disburses a monthly payment to the borrower on an increasing-balance loan; loan comes due when real estate is sold
Which of the following is a disadvantage of a second mortgage compared to credit card debt? The borrower gives up the tax deduction on the primary mortgage. The borrower will find it more difficult to qualify for a second mortgage loan. The borrower must pay points to get a second mortgage loan. The loans are secured by the borrower's home.
The loans are secured by the borrower's home
Which of the following is a disadvantage of a second mortgage compared to credit card debt? The borrower gives up the tax deduction on the primary mortgage. The borrower will find it more difficult to qualify for a second mortgage loan. The borrower must pay points to get a second mortgage loan. The loans are secured by the borrower's home.
The loans are secured by the borrower's home.
Which of the following are important ways in which mortgage markets differ from stock and bond markets? The usual borrowers in capital markets are government entities and large businesses, whereas the usual borrowers in mortgage markets are small businesses and individuals. The usual borrowers in capital markets are government entities, whereas the usual borrowers in mortgage markets are small businesses. The usual borrowers in capital markets are businesses and government entities, whereas the usual borrowers in mortgage markets are individuals. The usual borrowers in capital markets are government entities and large businesses, whereas the usual borrowers in mortgage markets are small businesses.
The usual borrowers in capital markets are government entities and large businesses, whereas
mortgage pass-through
a security that has the multiple borrowers' mortgage payments pass through a trustee before being disbursed to the investors
Distinct elements of a mortgage loan include investment. servicing. origination. all of the above. only B and C of the above.
all of the above.
During the last years of a balloon mortgage loan, the lender applies all of the monthly payment to the outstanding principal balance. most of the monthly payment to the outstanding principal balance. most of the monthly payment to interest on the loan. all of the monthly payment to interest on the loan. the monthly payment equally to interest on the loan and the outstanding principal balance.
all of the monthly payment to interest on the loan.
Mortgage-backed securities are securities collateralized by a pool of mortgages. have been growing in popularity in recent years as institutional investors look for attractive investment opportunities. are securities collateralized by both insured and uninsured mortgages. are all of the above. are only A and B of the above.
are all of the above.
From 2000 to 2005, housing prices increased, on average, by over 40%. This run up in prices was caused by an increase in subprime loans, which increased demand for new and existing houses. speculators. both A and B. None of the above are correct.
both A and B.
REMICs are most like Ginnie Mae pass-through securities. participation certificates. Freddie Mac pass-through securities. collateralized mortgage obligations.
collateralized mortgage obligations.
A loan-servicing agent will hold the loan in their investment portfolio. collect payments from the borrower. package the loan for an investor. do both A and C of the above. do both B and C of the above.
collect payments from the borrower.
Borrowers tend to prefer ________ to ________, whereas lenders prefer ________. ARMs; fixed-rate loans; ARMs fixed-rate loans; ARMs; fixed-rate loans ARMs; fixed-rate loans; fixed-rate loans fixed-rate loans; ARMs; ARMs
fixed-rate loans; ARMs; ARMs
private mortgage insurance (PMI)
insurance against default by the borrower
prepayment risk
lender risks borrower paying a lower interest rate in the future whereas a new loan could have a new, lower interest rate. -risk for lender is higher when the initial loan rate is high
The share of the mortgage market held by savings and loans is approximately 20 percent. approximately 40 percent. less than 5 percent. over 50 percent.
less than 5 percent.
Second mortgage (piggyback)
loans secured by the same real estate that is used to secure the first mortgage. Second mortgage is junior to original, meaning if default occurs, the second mortgage holder will be paid after the original loan is paid off and only if sufficient funds are available from selling the property -loan is secured by a second lien against the real estate; often used for lines of credit or home improvement loans
subprime loans
loans to borrowers who have that do not qualify for loans at the usual rate of interest due to poor credit ratings or other issues with collateral, etc.
Conventional mortgage
mortgage contracts originated by banks and other mortgage lenders that are not guaranteed by the FHA or the VA. Often insured by private mortgage insurance -loan is not guaranteed; usually requires private mortgage insurance; 5% to 20% down payment
balloon loans
most mortgages in the 1930s (think: Great Depression) were these type; borrower paid only interest for 3 to 5 years, at which time the entire loan amount became due
Second mortgages serve the following purposes: they allow borrowers to get a tax deduction on loans secured by their primary residence or vacation home. they give borrowers a way to use the equity they have in their homes as security for another loan. they allow borrowers to convert their conventional mortgages into GEMs. all of the above. only A and B of the above.
only A and B of the above.
Second mortgages serve the following purposes: they allow borrowers to get a tax deduction on loans secured by their primary residence or vacation home. they give borrowers a way to use the equity they have in their homes as security for another loan. they allow borrowers to convert their conventional mortgages into GEMs. all of the above. only A and B of the above.
only A and B of the above.
A borrower who qualifies for an FHA or VA loan enjoys the advantage that the mortgage payment is much lower. only a very low or zero down payment is required. the government holds the lien on the property. the cost of private mortgage insurance is lower.
only a very low or zero down payment is required.
Insured mortgage
originated by banks but are guaranteed by either the Federal Housing Administration (FHA) or the Veterans Administration (VA) -loan is guaranteed by FHA or VA; low or zero down payment
The Federal Housing Administration (FHA) funds purchases of mortgages by selling bonds to the public. was set up to buy mortgages from thrifts so that these institutions could make more loans. provides insurance for certain mortgage contracts. does all of the above. does only A and B of the above.
provides insurance for certain mortgage contracts.
mortgage backed securities (MBS) or securitized mortgage
security that is collateralized by a pool of mortgage loans
A borrower with a 30-year loan can create a GEM by converting his conventional mortgage into a GPM. converting his ARM into a conventional mortgage. simply increasing the monthly payments beyond what is required and designating that the excess be applied entirely to the principal. converting his conventional mortgage into an ARM.
simply increasing the monthly payments beyond what is required and designating that the excess be applied entirely to the principal.
The most common type of mortgage-backed security is the participation certificate, a security which passes the borrower's mortgage payments equally among all the owners of the certificates. collateralized mortgage obligations, a security which reduces prepayment risk. the securitized mortgage, a security which increases the liquidity of otherwise illiquid mortgages. the mortgage pass-through, a security that has the borrower's mortgage payments pass through the trustee before being disbursed to the investors.
the mortgage pass-through, a security that has the borrower's mortgage payments pass through the trustee before being disbursed to the investors.
Adjustable-rate mortgage
tied to some market interest rate and therefore changes over time. Usually have limits called caps, on how high (or low) the interest rate can move in one year and during the term of the loan -interest rate is tied to some other security and is adjusted periodically; size of adjustment is subject to annual limits
Graduated-payment mortgage
type of mortgage with lower payments in the first few years, then payments rise. Advantage of GPMs are that borrowers may qualify for a larger loan than a conventional mortgage -initial low payment increases each year; loan amortizes after 30 years
