Real Estate Finance & Investments, 16e (Brueggeman)
Chapter 19 The Secondary Mortgage Market: Pass-Through Securities
1) In 2008, Fannie Mae was spun off in an initial public offering as a private company.
2) The secondary mortgage market enables mortgage banking companies to sell existing
mortgages and thereby replenish funds with which new loans can be originated.
3) One difference between mortgage securities and corporate bonds is that mortgage securities
tend to be “overcollateralized.”
4) An optional delivery commitment, gives Fannie Mae the right (but not the obligation) to
purchase mortgage loans from originators.
5) Under the HUD Act of 1968, the assets, liabilities, and management of secondary market
operations were transferred to a completely private corporation known as “Ginnie Mae”
(GNMA).
6) The Federal Home Loan Mortgage Corporation’s (FHLMC) primary purpose is to provide
liquidity for conventional mortgage originators just as FNMA and GNMA did for originators of
FHA – VA mortgages.
7) When issuing mortgage-backed bonds, the issuer transfers ownership of the underlying
mortgage to the investors/bondholders.
8) When market interest rates exceed the coupon rate of a MBB, the price of the bond will be
greater than its par value.
9) Marking the mortgage to market is the process of accumulating mortgage pools and marketing
them to individual investors as mortgage-backed bonds.
10) A mortgage pass-through security represents an undivided ownership interest in a pool of
mortgages held by a trustee.
11) When a pass-through security investor makes repetitive requests of a mortgagor it is referred
to as a nuisance call.
12) Generally, prices for zero coupon mortgage-backed bonds are more sensitive to interest rate
changes than interest bearing MBBs.
13) The standard PSA prepayment curve assumes prepayments of 0.2% per month for the first 30
months and then 0.5% per month thereafter.
14) Issuers typically pledge 105 percent to 120 percent in mortgage collateral in excess of par
value of the securities issued, in order to overcollateralized MBBs.
15) Which of the following is NOT a major type of mortgage-related security?
A) Mortgage-backed bonds (MBBs)
B) Mortgage pass-through security (MPTs)
C) American depositary receipts (ADRs)
D) Collateralized mortgage obligations (CMOs)
16) A rising rate of market interest would have which of the following impacts on a mortgage
pass-through security?
A) Increase the market value of the MPT
B) Decrease the market value of the MPT
C) Increase or decrease, depending on whether the MPT was issued at a premium or a discount
D) The market rate of interest has no impact on the market value of a MPT
17) A falling rate of market interest would have which of the following impacts on a mortgage
pass-through security?
A) Increase prepayments on loans in the pool
B) Decrease prepayments on loans in the pool
C) Decrease the market value of the MPT
D) Both A and C
18) A 25-year maturity mortgage-backed bond is issued. The bond has a par value of $10,000
and promises to pay an 8 percent annual coupon. At issue, bond market investors require a 12
percent interest rate on the bond. What is the initial price on the bond?
A) $588
B) $5,686
C) $6,863
D) $14,270
19) A 25-year maturity mortgage-backed bond is issued. The bond has a par value of $10,000
and promises to pay an 8 percent annual coupon. At issue, bond market investors require a 12
percent interest rate on the bond. Assume that 20 years after the bond is issued, bond market
investors require a 15 percent interest rate on the bond. What is the market price of the bond?
A) $5,686
B) $6,863
C) $7,653
D) $14,270
20) A 10-year maturity mortgage-backed bond is issued. The bond is a zero coupon bond that
promises to pay $10,000 (par) after 10 years. At issue, bond market investors require a 15
percent interest rate on the bond. What is the initial price on the bond?
A) $2,252
B) $2,472
C) $8,696
D) $10,000
21) Which of the following developments assure mortgage investors they will receive interest
and principal payments at little or no risk?
A) The availability of hazard and title insurance
B) The availability of mortgage default insurance and loan guarantees
C) The development of standardized loan underwriting, processing, and servicing
D) All of the above
22) The Government National Mortgage Association (GNMA) was organized to perform three
principal functions. Which of the following is NOT a function of GNMA?
A) Provide special assistance lending in support of federal programs
B) Manage and liquidate mortgages previously acquired by FNMA
C) Manage all secondary mortgage market operations
D) Provide a guarantee for FHA/VA mortgage pools that would provide a guarantee for
mortgage backed securities
23) Which of the following statements regarding mortgage-backed bonds is generally TRUE?
A) The total value of the MBBs issued usually equals the value of the mortgages in the
underlying pool
B) Unlike corporate bonds, MBBs usually are issued with variable coupon rates of interest
C) Overcollateralization of the mortgage pool assures investors that the income from the
mortgage will be sufficient to pay the interest on bonds and the principal upon maturity
D) All of the above
24) When evaluating an investment in a mortgage pass-through security, which of the following
is NOT one of the characteristics of the underlying mortgage pool that should be considered?
A) The amount of overcollateralization of the mortgage pool
B) The geographic distribution of the mortgages
C) The amount of seasoned mortgages included in the pool
D) All of the above should be considered.
25) When pricing mortgage pass-through securities, issuers use each of the following methods to
include prepayment assumptions EXCEPT:
A) FHA prepayment experience
B) The pool factor technique
C) The PSA prepayment model
D) Constant rates of prepayment
26) Prices of mortgage pass-through securities are:
A) Unaffected by changes in interest rates
B) Related positively to changes in interest rates
C) More sensitive to declines in interest rates and less sensitive to increases in interest rates
D) Less sensitive to declines in interest rates and more sensitive to increases in interest rates
27) Compared to mortgage pass-though securities (MPTs), MBBs should be priced to provide:
A) Lower yields, because the MBB issuer bears lower prepayment risk
B) Higher yields, because the MBB issuer bears higher prepayment risks
C) The same yields, because of equivalent amounts of prepayment risk
D) None of the above
28) If a mortgage pool consists of five 10% FRMs totaling $500,000, five 9% FRMs totaling
$450,000, and ten 8% FRMs totaling $750,000, what is the weighted average coupon (WAC)
rate?
A) 8.75%
B) 8.85%
C) 9.00%
D) None of the above
29) The pass-through rate is the coupon rate of interest promised by the issuer of a pass-through
security to the investor. In most instances, the pass-through rate is:
A) Equal to the average rate of interest on all mortgages in the underlying pool
B) Lower than the lowest rate of interest on any mortgage in the underlying mortgage pool
C) Higher than the highest rate of interest on any mortgage in the underlying mortgage pool
D) None of the above
30) All other conditions being the same, the more seasoned a mortgage is:
A) The greater the likelihood of prepayment
B) The greater the likelihood of default
C) The greater the likelihood that the mortgage will be carried to maturity
D) All of the above
31) Which of the following is NOT a guarantee of Ginnie Mae (GNMA)?
A) Timely payments of principal and interest
B) Settling accounts with servicer
C) All mortgages would be paid off at maturity
D) Upon default they will repay outstanding loan balance
32) The primary purpose of Freddie Mac (FHLMC) is to:
A) Provide a secondary market for mortgage originators
B) Provide investors with a guaranteed rate of return
C) Create competition for Fannie Mae and Ginnie Mae
D) Provide consumers with more options when deciding on a mortgage loan
33) Which of the following is FALSE regarding mortgage-backed bonds (MBBs):
A) Their issuer retains ownership of mortgages
B) Their maturity is indefinite at issuance
C) They are issued with fixed coupon rates
D) They are usually underwritten by investment banking companies
34) The investment rating for mortgage-backed bonds depends on each of the following
EXCEPT:
A) Appraised value and DCR
B) Interest rates in mortgage pool
C) Extent of over collateralization
D) Initial price paid for the security
35) Which of the following is NOT a risk for mortgage-backed securities?
A) Default risk
B) Delayed payment risk
C) Pass-through risk
D) Interest rate risk
36) The practice that is implemented with MBBs to compensate for the likelihood that some
borrowers will default or make delayed payments on mortgage loans that make up the pool is:
A) Default compensation
B) Tardy payment compensation
C) Prompt payment actions
D) Overcollateralization
37) The process that a trustee would use in assessing whether the value of a mortgage pool is
within the required overcollateralization levels is referred to as:
A) Overcollateralization process
B) Marking to market
C) MBB appraisal
D) Market value assessment