33) The Federal Housing Administration (FHA)
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.
34) ________ issues participation certificates, and ________ provides federal insurance for
participation certificates.
A) Freddie Mac; Freddie Mac
B) Freddie Mac; Ginnie Mae
C) Ginnie Mae; Freddie Mac
D) Ginnie Mae; Ginnie Mae
E) Freddie Mac; no one
35) REMICs are most like
A) Freddie Mac pass-through securities.
B) Ginnie Mae pass-through securities.
C) participation certificates.
D) collateralized mortgage obligations.
36) Ginnie Mae
A) insures qualifying mortgages.
B) insures pass-through certificates.
C) insures collateralized mortgage obligations.
D) does only A and B. of the above.
E) does only B and C of the above.
37) Mortgage-backed securities
A) have been growing in popularity in recent years as institutional investors look for attractive
investment opportunities.
B) are securities collateralized by a pool of mortgages.
C) are securities collateralized by both insured and uninsured mortgages.
D) are all of the above.
E) are only A and B of the above.
38) The most common type of mortgage-backed security is
A) the mortgage pass-through, a security that has the borrower’s mortgage payments pass
through the trustee before being disbursed to the investors.
B) collateralized mortgage obligations, a security which reduces prepayment risk.
C) the participation certificate, a security which passes the borrower’s mortgage payments
equally among all the owners of the certificates.
D) the securitized mortgage, a security which increases the liquidity of otherwise illiquid
mortgages.
39) The interest rate borrowers pay on their mortgages is determined by
A) current long-term market rates.
B) the term.
C) the number of discount points.
D) all of the above.
40) 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) a subprime mortgage.
B) a securitized mortgage.
C) an insured mortgage.
D) a graduated-payment mortgage.
41) 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) discount points.
B) loan terms.
C) collateral.
D) down payment.
42) Which of the following terms are found in mortgage loan contracts to protect the lender from
financial loss?
A) Collateral
B) Down payment
C) Private mortgage insurance
D) All of the above
43) What factors are used in determining a person’s FICO score?
A) Past payment history
B) Outstanding debt
C) Length of credit history
D) All of the above
Answer: D
Topic: Chapter 14.2 Characteristics of the Residential Mortgage
Question Status: Previous Edition
44) Between 2000 and 2005, home prices increased an average of ________ per year.
A) 2%
B) 4%
C) 8%
D) 12%
45) From 2000 to 2005, housing prices increased, on average, by over 40%. This run up in
prices was caused by
A) speculators.
B) an increase in subprime loans, which increased demand for new and existing houses.
C) both A and B.
D) None of the above are correct.
1) In 2012, mortgage loans to farms represented the largest proportion of mortgage lending in the
U.S.
2) Down payments are designed to reduce the likelihood of default on mortgage loans.
3) Discount points (or simply points) are interest payments made at the beginning of a loan.
4) A point on a mortgage loan refers to one monthly payment of principal and interest.
5) Closing for a mortgage loan refers to the moment the loan is paid off.
6) Private mortgage insurance is a policy that guarantees to make up any discrepancy between
the value of the property and the loan amount, should a default occur.
7) During the early years of a mortgage loan, the lender applies most of the payment to the
principal on the loan.
8) One important advantage to a borrower who qualifies for an FHA or VA loan is the very low
interest rate on the mortgage.
9) Adjustable-rate mortgages generally have lower initial interest rates than fixed-rate mortgages.
10) Mortgage interest rates loosely track interest rates on three-month Treasury bills.
11) An advantage of a graduated-payment mortgage is that borrowers will qualify for a larger
loan than if they requested a conventional mortgage.
12) Nearly half the funds for mortgage lending comes from mortgage pools and trusts.
13) Many institutions that make mortgage loans do not want to hold large portfolios of long-term
securities, because it would subject them to unacceptably high interest-rate risk.
14) A problem that initially hindered the marketability of mortgages in a secondary market was
that they were not standardized.
15) Mortgage-backed securities have declined in popularity in recent years as institutional
investors have sought higher returns in other markets.
16) Mortgage-backed securities are marketable securities collateralized by a pool of mortgages.
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17) Fannie Mae and Freddie Mac together either own or insure the risk on nearly one-fourth of
America’s residential mortgages.
18) A FICO score below 660 is considered good while a score above 720 is likely to cause
problems in obtaining a loan.
19) Subprime loans are those made to 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.
1) How has the modern mortgage market changed over recent years?
Topic: Chapter 14.1 What Are Mortgages?
Question Status: Previous Edition
2) Explain the features of mortgage loans that are designed to reduce the likelihood of default.
Topic: Chapter 14.2 Characteristics of the Residential Mortgage
Question Status: Previous Edition
3) What are points? What is their purpose?
Topic: Chapter 14.2 Characteristics of the Residential Mortgage
Question Status: Previous Edition
4) How does an amortizing mortgage loan differ from a balloon mortgage loan?
Topic: Chapter 14.2 Characteristics of the Residential Mortgage
Question Status: Previous Edition
5) Evaluate the advantages and disadvantages, from both the lender’s and borrower’s
perspectives, of fixed-rate and adjustable-rate mortgages.
Topic: Chapter 14.3 Types of Mortgages
Question Status: Previous Edition
6) Why has the online lending market developed in recent years and what are the advantages and
disadvantages of this development?
Topic: Chapter 14.4 Mortgage-Lending Institutions
Question Status: Previous Edition
15
7) Why may Fannie Mae and Freddie Mac pose a threat to the health of the financial system?
Topic: Chapter 14.8 What Is a Mortgage-Backed Security?
Question Status: Previous Edition
8) What are mortgage-backed securities, why were they developed, what types of mortgage-
backed securities are there, and how do they work?
Topic: Chapter 14.8 What Is a Mortgage-Backed Security?
Question Status: Previous Edition
9) What are the benefits and side effects of securitized mortgages?
Topic: Chapter 14.7 Securitization of Mortgages
Question Status: Previous Edition
10) Discuss the pros and cons of a subprime market for residential mortgages in the U.S.
Topic: Chapter 14.8 What Is a Mortgage-Backed Security?
Question Status: New Question