Chapter 09: Mortgage Markets
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Page 1
1. Mortgage-backed securities are commonly contained within collateralized debt obligations.
a.
True
b.
False
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
2. Federally insured mortgages guarantee
a.
b.
c.
d.
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
3. At a given point in time, the interest rate offered on a new fixed-rate mortgage is typically ____ the initial interest rate
offered on a new adjustable-rate mortgage.
a.
below
b.
above
c.
equal to
d.
all of the above are very common
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
4. An institution that originates and holds a fixed-rate mortgage is adversely affected by ____ interest rates; the borrower
who was provided the mortgage is adversely affected by ____ interest rates.
a.
stable; decreasing
b.
increasing; stable
c.
increasing; decreasing
d.
decreasing; increasing
ANSWER:
c
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
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Page 2
5. Rates for adjustable-rate mortgages are commonly tied to the
a.
average prime rate over the previous year.
b.
Fed’s discount rate over the previous year.
c.
average Treasury bill rate over the previous year.
d.
average Treasury bond rate over the previous year.
ANSWER:
c
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
6. Caps on mortgage rate fluctuations with adjustable-rate mortgages (ARMs) are typically
a.
2 percent per year and 5 percent for the mortgage lifetime.
b.
5 percent per year and 15 percent for the mortgage lifetime.
c.
0 percent per year and 10 percent for the mortgage lifetime.
d.
3 percent per year and 8 percent for the mortgage lifetime.
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
7. From the perspective of the lending financial institution, interest rate risk is
a.
lower on a 30-year fixed-rate mortgage than on a 15-year fixed-rate mortgage.
b.
lower on a 15-year fixed-rate mortgage than on a 30-year fixed-rate mortgage.
c.
higher on a 15-year fixed-rate mortgage than on a 30-year fixed-rate mortgage.
d.
higher on a 15-year adjustable-rate mortgage than on a 30-year adjustable-rate mortgage.
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
Chapter 09: Mortgage Markets
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Page 4
b.
False
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
12. Use an amortization schedule. A 15-year $100,000 mortgage has a fixed mortgage rate of 9 percent. In the first month,
the total mortgage payment is $____, and $____ of this amount represents payment of interest.
a.
1,014; 264
b.
1,241; 750
c.
1,014; 750
d.
none of the above
ANSWER:
c
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.09.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Application
13. A mortgage that requires interest payments for a three- to five-year period, then full payment of principal, is a(n)
a.
chattel mortgage.
b.
balloon-payment mortgage.
c.
variable-rate mortgage.
d.
open-ended mortgage bond.
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
14. A mortgage with low initial payments that increase over time without ever leveling off is a
a.
graduated payment mortgage.
b.
growing-equity mortgage.
c.
second mortgage.
d.
shared-appreciation mortgage.
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
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Page 5
15. The interest rate on a second mortgage is ____ on a first mortgage created at the same time, because the second
mortgage is ____ the existing first mortgage in priority claim against the property in the event of default.
a.
higher than; behind
b.
equal to that; equal to
c.
lower than; ahead of
d.
higher than; ahead of
e.
lower than; behind
ANSWER:
a
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.09.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
16. Which of the following mortgages allows the home purchaser to obtain a mortgage at a below-market interest rate
throughout the life of the mortgage?
a.
second mortgage
b.
growing-equity mortgage
c.
graduated-payment mortgage
d.
shared-appreciation mortgage
ANSWER:
d
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
17. A ____ mortgage allows the borrower to initially make small payments on the mortgage. The payments then increase
over the first 5 to 10 years and then level off.
a.
graduated-payment mortgage
b.
growing-equity mortgage
c.
second mortgage
d.
shared-appreciation mortgage
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
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Page 6
18. Mortgage companies, commercial banks, and savings institutions are the primary originators of mortgages.
a.
True
b.
False
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
19. ____ was created in 1968 as a corporation that is wholly owned by the federal government. It guarantees payment on
mortgages that meet specific criteria.
a.
Freddie Mac
b.
Ginnie Mae
c.
Fannie Mae
d.
None of the above
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
20. “Securitization” refers to the private insurance of conventional mortgages.
a.
True
b.
False
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
21. A financial institution may service a mortgage even after selling it.
a.
True
b.
False
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
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Page 7
22. The difference between the 30-year mortgage rate and the 30-year Treasury bond rate is primarily attributable to
a.
interest rate risk.
b.
reinvestment rate risk.
c.
credit risk.
d.
insurance risk.
ANSWER:
c
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
23. Which of the following is not a guarantor of federally insured mortgages?
a.
Federal Housing Administration (FHA)
b.
Veterans Administration (VA)
c.
Federal Deposit Insurance Corporation (FDIC)
d.
All of the above are guarantors of federally insured mortgages.
ANSWER:
c
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
24. ___ economic growth will probably ____ the risk premium on mortgages and ____ the price of mortgages.
a.
Strong; increase; decrease
b.
Strong; increase; increase
c.
Weak; decrease; increase
d.
Weak; increase; increase
e.
Weak; decrease; decrease
ANSWER:
c
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.09.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
Chapter 09: Mortgage Markets
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Page 8
25. A ____ mortgage allows borrowers to initially make small payments on the mortgage, which are then increased on a
graduated basis over the first five to ten years; payments then level off from there on.
a.
balloon-payment
b.
graduated-payment
c.
shared-appreciation
d.
growing-equity
e.
none of the above
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
26. An adjustable-rate mortgage increases interest rate risk for the ____, but reduces interest rate risk for the ____.
a.
originator; borrower
b.
borrower; originator
c.
government; originator
d.
none of the above
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
27. When financial institutions originate residential mortgages, the mortgage contract should not specify
a.
whether the mortgage is federally insured.
b.
the amount of the loan.
c.
whether the interest rate is fixed or adjustable.
d.
the maturity.
e.
the mortgage contract should specify all of the above
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
28. Which of the following is not a common type of mortgage-backed security according to your text?
a.
participation certificates (PCs)
Chapter 09: Mortgage Markets
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Page 9
b.
collateralized mortgage obligations (CMOs)
c.
balloon-payment mortgage certificates
d.
private-label pass-through securities
e.
All of the above are common types of mortgage pass-through securities.
ANSWER:
c
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.09.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
29. ____ risk is the risk that a borrower may prepay the mortgage in response to a decline in interest rates.
a.
Interest rate
b.
Credit
c.
Prepayment
d.
Reinvestment rate
ANSWER:
c
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
30. Mortgage-backed securities are assigned ratings by:
a.
rating agencies.
b.
the Treasury.
c.
the Fed.
d.
the mortgage originator.
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
31. In a collateralized mortgage obligation (CMO), mortgages are segmented into ____ (or classes).
a.
balloon payments
b.
caps
c.
tranches
d.
strips
ANSWER:
c
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
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Page 10
32. The credit crisis is mostly attributed to the use of:
a.
strict criteria applied by mortgage originators.
b.
liberal criteria applied by mortgage originators.
c.
very tough credit ratings applied to mortgages.
d.
fixed-rate mortgages with long terms to maturity.
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.05
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
33. Fannie Mae and Freddie Mac experienced financial problems during the credit crisis because they:
a.
were unwilling to finance new mortgages.
b.
invested heavily in balloon mortgages.
c.
invested only in prime mortgages that offered very low returns.
d.
invested heavily in subprime mortgages.
ANSWER:
d
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.09.05
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
34. ____ mortgages enabled more people with relatively lower income, or high existing debt, or a small down payment to
purchase homes.
a.
Prime
b.
Balloon
c.
Amortized
d.
Subprime
ANSWER:
d
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
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Page 11
35. The secondary mortgage market accommodates originators of mortgages who desire to sell their mortgages before
maturity.
a.
True
b.
False
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
36. Regardless of what happens to market interest rates, most adjustable-rate mortgages (ARMs) specify a maximum
allowable fluctuation in the mortgage rate per year and over the mortgage life.
a.
True
b.
False
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
37. Some adjustable-rate mortgages (ARMs) contain an option clause that allows mortgage holders to switch to a fixed-
rate mortgage within a specified period.
a.
True
b.
False
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
38. Mortgage lenders normally charge a higher initial interest rate on adjustable-rate mortgages than on fixed-rate
mortgages.
a.
True
b.
False
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
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Page 12
39. A balloon-payment mortgage requires interest payments for a three– to five-year period. At the end of this period, full
payment of the principal (the balloon payment) is required.
a.
True
b.
False
ANSWER:
a
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.09.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
40. During the early years of a mortgage, most of the monthly payment reflects principal.
a.
True
b.
False
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
41. Mortgages are rarely sold in the secondary market.
a.
True
b.
False
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
42. An increase in either the risk-free rate or the risk premium on a fixed-rate mortgage results in a higher required rate of
return when investing in the mortgage and therefore causes the mortgage price to decrease.
a.
True
b.
False
ANSWER:
a
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.09.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
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Page 13
43. Strong economic growth tends to reduce the probability that the issuer of a mortgage will default on its debt payments
and therefore tends to decrease mortgage prices.
a.
True
b.
False
ANSWER:
b
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.09.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
44. The higher the level of equity invested by the borrower, the higher the probability that the loan will default.
a.
True
b.
False
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
45. Borrowers who have a lower level of income relative to the periodic loan payments are more likely to default on their
mortgages.
a.
True
b.
False
ANSWER:
a
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.09.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
46. Non-U.S. financial institutions never hold mortgages on U.S. property.
a.
True
b.
False
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.05
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
Copyright Cengage Learning. Powered by Cognero.
Page 14
47. The ____ market accommodates originators of mortgages that desire to sell their mortgages prior to maturity.
a.
primary
b.
secondary
c.
money
d.
none of the above
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
48. Financial institutions that hold fixed-rate mortgages in their asset portfolios are exposed to ____ risk, because they
commonly use funds obtained from short-term customer deposits to make long-term mortgage loans.
a.
exchange rate
b.
prepayment
c.
reinvestment rate
d.
interest rate
e.
exchange rate
ANSWER:
d
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.09.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
49. From the perspective of the lending financial institution, there is a ____ degree of interest rate risk for ____-maturity
mortgages.
a.
higher; shorter
b.
higher; longer
c.
lower; shorter
d.
lower; higher
e.
Answers B and C are correct
ANSWER:
e
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
Copyright Cengage Learning. Powered by Cognero.
Page 15
50. In the earlier years of a mortgage,
a.
most of the monthly payment reflects principal reduction.
b.
most of the monthly payment reflects interest.
c.
about half of the monthly payment reflects interest.
d.
all of the monthly payment reflects principal reduction.
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
51. Which of the following will typically require homeowners to ultimately request a new mortgage?
a.
graduated-payment mortgage (GPM)
b.
growing-equity mortgage
c.
balloon-payment mortgage
d.
shared-appreciation mortgage
ANSWER:
c
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
52. Which of the following is not true with respect to a growing-equity mortgage?
a.
It is similar to a graduated-payment mortgage
b.
It allows borrowers to initially make small payments on the mortgage.
c.
It involves increased payments, on a graduated basis, over the first five to ten years of the mortgage.
d.
It involves payments that level off after the first five to ten years of the mortgage.
ANSWER:
d
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.09.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
Chapter 09: Mortgage Markets
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Page 16
53. Which of the following is not a correct description of qualified mortgages?
a.
They must comply with regulations issued by the Consumer Financial Protection Bureau.
b.
Their term cannot exceed 30 years.
c.
They cannot be interest-only mortgages or result in negative amortization.
d.
They must be retained by the lending institution that originated the mortgages and cannot be sold.
e.
They place limits on the borrower’s debt-to-income ratio.
ANSWER:
d
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.09.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
54. The probability that a borrower will default (credit risk) is influenced by all of the following, except
a.
economic conditions.
b.
the level of equity invested by the borrower
c.
the borrower‘s income level.
d.
the borrower‘s credit history.
e.
Credit risk is affected by all of the above.
ANSWER:
a
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.09.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
55. In a short sale of a home:
a.
the lender forecloses and then sells the home for less than what is owed on the mortgage.
b.
the lender allows the homeowner to sell the home for less than what is owed on the mortgage.
c.
the lender does not recover the full amount of the mortgage.
d.
B and C
e.
A and C
ANSWER:
d
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.09.05
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
56. An investor in interest-only collateralized mortgage obligations (CMOs) would not be concerned that homeowners
will prepay the underlying mortgages.
Chapter 09: Mortgage Markets
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Page 17
a.
True
b.
False
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
57.
The valuation of mortgage-backed securities is difficult because of limited
transparency.
a.
True
b.
False
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
58. A(n) _________ problem occurs when a person or institution does not have to bear the full consequences of its
behavior and therefore assumes more risk than it otherwise would.
a.
asymmetric information
b.
moral hazard
c.
risk adjustment
d.
specific hazard
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.05
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
59. A __________ is a privately negotiated contract that protects investors against the risk of default on particular debt
securities such as mortgage-backed securities.
a.
default insurance contract
b.
default risk swap
c.
credit default swap
d.
collateralized debt obligation
ANSWER:
c
POINTS:
1
Chapter 09: Mortgage Markets
Copyright Cengage Learning. Powered by Cognero.
Page 19
d.
inversely; inversely
ANSWER:
a
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.09.05
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
64. Bear Stearns commonly used __________ as collateral when borrowing short-term funds, but its funding was cut off
because prospective creditors questioned the quality of the collateral.
a.
commercial paper
b.
Treasury securities
c.
its stock
d.
mortgages
ANSWER:
d
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.05
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
65. Lehman Brothers commonly used _________ as collateral when borrowing short-term funds, but its funding was cut
off because prospective creditors questioned the quality of the collateral.
a.
commercial paper
b.
Treasury securities
c.
its stock
d.
mortgages
ANSWER:
d
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.09.05
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge