Real Estate Finance Exam 2

For 95% loan-to-value loans FNMA requires that, as a percent of gross income, the payment not exceed:

25%

Government Sponsored Enterprises refers to

FNMA and FHLMC

In 1938 Congress established as a subsidiary of the Reconstruction Finance Corporation the

Federal National Mortgage Association

In 1938 Congress established as a unit of the Reconstruction Finance Corporation the

Federal National Mortgage Association

The following is not an alternative mortgage instrument

HFR

Fannie Mae supports the secondary mortgage market by

Issuing mortgage related securities and buying mortgages

CDSs were originated in the 1997 as a result of regulatory loophole by

JPMorgan Chase

The act that promotes the establishment by states of a National Mortgage Licensing System is

SAFE Mortgage Licensing Act of 2008

A secondary mortgage transaction that occurs when a lender sells mortgages to an agency that, in turn, issues an MRS, such as a pass-through, back to the lender is referred to as a

SWAP

In any one period (month) the cash flows from a pool of several hundred mortgages will consist of:

a,b, and c

Desirable characteristics of mortgage-related securities include

all of the above

Mark-to-market accounting refers to

all of the above

Players that facilitate transactions in the secondary market include

all of the above

The index on an adjustable rate mortgage must be:

all of the above

To be successful, MRSs need

all of the above

Variables that affect the sinking fund balance include

all of the above

The cash flows of mortgage-backed bonds

b and c

An increase in the market rate of interest will

both a and b

Default occurs when the borrower fails to

both a and b

Prior to the secondary mortgage market it was difficult for thrifts to sell mortgages because

both a and b

When the owner of an MBS receives from a CDS owner an amount eaqual to the difference between the market value and face value of the MBS it is called:

cash settlement

The mortgage-related security that goes the furthest in rearranging the cash flows from a pool of mortgages is:

collateralized mortgage obligations

The CPR of passthroughs refers to:

constant prepayment rate

FNMA and FHLMC are

corporations originated through federal legislation

An owner of an MBS agrees to make a series of payments for five years on a CDS. The annual payments are called

either price or spread

Which of the following is true?

even a slight increase in the default rate of a sinking fund has a dramatic impact on its balance

The secondary mortgage market is one in which

existing mortgages are bought and sold

Which of the following is false?

for a premium security, an acceleration in prepayments increases the yield

The Emergency Economic Stabilization Act of 2008

gives the SEC the authority to suspend mark-to-market accounting if it determines the suspension is in the best interest of the public and will protect investors

When a loan is originated the lender will make certain that the appraised value of the house is:

greater than the amount of the loan

The tilt problem causes the real payment on a fixed rate mortgage to be

high at the beginning and low at the end

Rating agencies review the credit risk of the collateral of CMOs for all of the following except

interest rates

Credit risk refers to

is the risk that an MBS issuer may default on the obligations

The following is NOT characteristic of an adjustable rate mortgage

it has lower risk for the borrower than do fixed rate mortgages

If prepayments of a mortgage pool accelerate

it is advantageous to the PO investor

One of the non-economic factors affecting the prepayment behavior of a mortgage pool is:

job relocation

Borrower qualification considers all of the following except:

location of the borrower

Mortgage related securities that offer cash flows similar to corporate bonds are

mortgage backed bonds

Mortgage-related securities that promise payments similar to corporate bonds are called

mortgage backed bonds

To understand the ARM reset problem you should consider the agency problem between _________ and _________:

mortgage brokers and the secondary mortgage market

The first popular MRSs were

mortgage pass-through bonds

The investor is said to have an undivided interest in the pool of mortgages or ownership in the mortgages in the following type of mortgage-related security

mortgage passthrough securities

The following are mortgage-related securities that are a cross between passthroughs and MBBs

mortgage pay-through bonds

A security for which the cash flows derived from mortgages are rearranged in terms of amount and timing is a

mortgage-derivative security

A security for which the cash flows derived from mortgages are rearranged in terms of amount and timing is referred to as:

mortgage-derivative security

When there is an increase in the loan balance due to payments less than the interest charge on an adjustable rate mortgage, the result will be

negative amortization

If the value of an Interest-Only strip moves in the same direction as market interest rates, this means that an Interest-Only strip has:

negative duration

Ginnie Mae

none of the above

Deficiency judgements are often hard to obtain because

of the ability of borrowers to declare personal bankruptcy

Grantor trusts were developed for use with

pass-through bonds

The value of a PO will fall as a net effect if:

the market interest rate is up and the prepayment rate is down

The longer the time between rate adjustments on an adjustable rate mortgage

the more risk assumed by the lender

The current industry standard for the model of expected prepayments is:

the public securities association model

Counter party risk is

the risk that either party to a contract may default

A secondary mortgage market is where existing mortgages are

Bought and sold

The Federal National Mortgage Association reduced interest rates on mortgages relative to other securities in the mid-eighties by issuing

CMOs and passthroughs

In regards to a CDS a reference entity is

MBS

Valuing mortgages on a frequent basis as as result of the changes in interest rates is referred to as

Mark-to-market

For mortgage securities

a,b, and c

Congress passed the housing and urban development act in

1968

A lengthy foreclosure process can lead a loss as a percent of the balance of:

40% to 50%

The purpose of Housing Finance Agencies (HFAs) is to:

A and B

The alternative mortgage instrument that has the least amount of interest rate risk for the lender is

ARM

Today's mortgage market is dominated by

FRMs and ARMs

A rise in interest rates will cause the market value of existing mortgages to

Fall

An agency that extends loans to rural areas of farms, houses, and community facilities is:

Federal Agricultural Mortgage Corporation

The federal agency that guarantees the timely payment of 90% of the principal and interest from a pool of mortgages is:

Federal Agricultural Mortgage Corporation

The agriculturally related system that merged into 37 farm credit banks was

Federal Land Banks and Federal Intermediate Credit Banks

Mortgage pay-through bonds are a cross between the following two mortgage related securities

Pass-throughs and MBBs

Servicing a pool of loans may NOT include:

Sending notices of default to the government

A Price Level Adjusted Mortgage (PLAM)

Solves the problem of the tilt effect and interest rate risk

The main advantage of a Pledged Account Mortgage for the borrower is:

The lower initial payment and affordability

The longer the adjustment period on an ARM

The lower the value of the ARM to the lender

The following is NOT true of a Shared Appreciation Mortgage

There are annual adjustments to the contract rate

A secondary mortgage market transaction that occurs when a lender sells mortgages to an agency which, in turn issues an NMS back to the lender is called

a swap

The secondary mortgage market developed because it solved

a and b

A reason not to refinance a loan is

a higher level of income for the borrower

The following is NOT a characteristic of a graduated payment mortgage:

payments are higher at the beginning and lower at the end

When the owner of an MBS renders it in return for a cash payment equal to its par or face value it is called a

physical settlement

Payments of principal from a pool of mortgages in excess of scheduled amortization is referred to as

prepayment

Maintaining a certain value of an adjustable rate mortgage by trading off caps and discount points can be referred to as:

pricing ARM terms

The purpose of the Farm Credit Assistance Financial Corporation is to

provide capital to Farm Credit Banks

Low interest mortgages are less likely to prepay if market interest rates have

risen

The term, mortgage-related security, refers to

securities backed up by mortgages

A promissory note should be

sold with the mortgage transferred with it

A promissory note should be:

sold with the mortgage transferred with it

A homeowner with negative equity in his or her house will:

sometimes default

If the value of the IO strip is most sensitive to changes in the market rate when this rate is between 100 and 300 basis points below the coupon on the pool, then those investors who desire to obtain the hedging benefits of the IO strip should purchase:

strips of passthroughs 100-300 points above the market rate

Mortgage quality can be affected by all of the following except

term of the loan

The revenues associated with servicing loans include all except

the administrative and overhead costs associated with servicing the pool

With a Reverse Annuity Mortgage

the borrower receives monthly payments and makes a large repayment at the end of the mortgage term

For traditional debt securities which of the following is false?

the longer the duration (similar to maturity) of the obligation, the less the changes in value as a result of a change in market rates

For a pool of mortgages (with no defaults), which of the following is false?

the total amount of principal (both scheduled and prepayments) that will be paid from the pool will depend upon changes in the interest rates

Which is true

the value of a pass-through is the sum of the component IO and PO

For premium passthrough securities, which of the following is false?

the value of the high coupon is somewhat offset by a lower expected prepayment rate

The duration of passthroughs can be measured by:

they are impossible to calculate because of uncertain prepayments

A graph of the PSA model for the prepayment rate on a pool of mortgages will produce a spike in the _________ year of cash flows

third

Investors are attracted to pass-through bonds because of all of the following except

timing of the cash flows

With a mortgage pass-through security the investor is said to have a

undivided interest in the mortgage pool

With the secondary mortgage market, the number of assets and liabilities are

unlimited