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CHAPTER 9
TRUE/FALSE QUESTIONS
markets.
line of credit from the U.S. Treasury.
(T) 5. Mortgage originators may retain the servicing right and fees even though the mortgage
has been sold to a governmental agency.
denominations.
on the declining principal.
lender takes a lien against the home.
lender.
funds to provide indirect mortgage financing.
homeowners, providing a predictable stream of cash flow to the investor.
income to investor.
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rating.
mortgage is outstanding.
traded debt securities is collateralization.
Home Loan Banks is Federal Housing Finance Agency.
MULTIPLE CHOICE QUESTIONS
house if you expected the annual rate of inflation would be higher than most people
thought?
a. reverse annuity mortgage
b. interest-only mortgage
c. adjustable-rate mortgage
d. fixed-rate mortgage
a. They are similar to “Ginnie Maes” in that they are backed by mortgages that
qualify for FHA or VA guarantees.
b. PIPs are issued by private institutions or mortgage bankers.
c. They are similar to “Ginnie Maes” except that they are backed by conventional
mortgages that do not qualify for FHA or VA guarantees.
d. They are typically used to securitize large, non-conforming mortgage loans
called jumbo loans.
required payments is called a(n)
a. rollover mortgage
b. reverse annuity mortgage
c. adjustable-rate mortgage
d. home equity loan
a. corporate bonds
b. mortgages
c. state and municipal bonds
d. U.S. Treasury debt
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financed for 15 years?
a. $1830
b. $1798
c. $1679
d. $1721
rate. What is the loan balance after 10 years if paid as agreed?
a. $92,721
b. $83,581
c. $85,492
d. $90,785
of 30 years?
a. $657
b. $632
c. $638
d. $612
6.5% rate, how soon would your loan be paid off?
a. 249 months
b. 227 months
c. 185 months
d. 278 months
e. 360 months
monthly. What is your monthly payment?
a. $338
b. $339
c. $353
d. $369
year loan?
a. $305
b. $265
c. $257
d. $292
e. $338
mortgage loan?
a. 75 months
b. 90 months
c. 112 months
d. 123 months
e. 131 months
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expected inflation of uncertain magnitude?
a. reverse annuity mortgages
b. conventional fixed-rate mortgages
c. adjustable-rate mortgage loans
d. balloon payment mortgages
United States?
a. life insurance companies and pension funds
b. government agencies
c. mortgage pools
d. thrift institutions
what type of mortgage would you most like to hold?
a. balloon payment, ten years
b. Rollover mortgage, two years
c. adjustable-rate mortgage, monthly
d. fixed-rate mortgage, 15 years
a. They may not be repaid in full for 25 to 30 years.
b. They are viewed by the capital markets as having average maturities of much less
than 30 years.
c. Their interest and principal repayments are predictable.
d. They pass through all payments of principal and interest from the underlying
pool of mortgages to the investors.
mortgage securities?
a. The securities are readily marketable.
b. They have little default risk.
c. The investor receives cash flows in proportion to his/her ownership proportion.
d. The timing of the cash flow return from the securities is quite predictable.
e. All of the above are reasonable expectations for investors in pass-throughs.
a. a jumbo mortgage
b. a Ginni Mae pass-through
c. a collateralized mortgage obligation
d. a real estate mortgage investment conduit (REMIC)
e. All of the above are mortgage-backed securities.
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because
a. they want to compete with the thrifts.
b. they want to help local thrift institutions.
c. they can obtain funds for mortgage financing cheaply by selling tax-exempt
securities.
d. they lend to lower income, larger home buyers.
the last 20 years, are
a. thrift institutions and commercial banks.
b. commercial banks and insurance companies/pension funds.
c. mortgage pools and thrift institutions.
d. mortgage pools and commercial banks.
a. seller of the home.
b. FHA.
c. borrower.
d. lender.
e. government.
a. Interest and principal from borrowers are passed through to investor.
b. Federally insured imply mortgage loans guaranteed by the FHA, VA, and other
authorized federal agencies.
c. GNMA pass-throughs are secured by mortgage pools originated by mortgage
banks, commercial banks, or other mortgage lending institutions.
d. all of the above
action?
a. invest in conventional fixed-rate loans
b. invest in variable-rate loans
c. make and sell eligible loans to the FHLMC
d. make equity-participation mortgages
9 percent?
a. $636.09
b. $881.16
c. $763.31
d. $677.82
a home costing $150,000 with a 25-year, 9% loan?
a. $881.16
b. $702.32
c. $787.50
d. $726.31
e. $583.33
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the remaining balance on the mortgage after five years?
a. $ 81,450
b. $100,666
c. $ 79,097
d. $84,000
e. $ 97,936
the future would want
a. an interest rate “cap” on their loans.
b. a second mortgage on the home.
c. to lengthen the “adjusting” time period.
d. no limits on the variability of the rates.
a. Treasury security rates
b. Dow Jones Mortgage Rate Index
c. S&L cost of funds index
d. current fixed-rate mortgage index
e. LIBOR
a. The borrower’s payments will increase.
b. The maturity of the loan will be extended.
c. The principal of the loan will increase.
d. The borrower’s payments will decrease.
a. REMIC securities provide tax-free income to investors.
b. REMIC securities provide level cash flows similar to CMOs.
c. REMIC securities may be backed by pass-through securities issued by FHLMC
or FNMA.
d. The Tax Reform Act of 1986 encouraged the use of REMICs.
a. bring together borrowers and suppliers of long-term funds.
b. are always secured by the pledge of real property.
c. are characterized by small, risky borrowers.
d. issued in standard denominations.
e. all of the above
a. a long-term is converted to a short-term loan.
b. the equity in the house declines as the loan is paid down.
c. the loan is repaid in equal, consecutive payments.
d. interest is paid first entirely, and then the principal
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means
a. the contract is very complex.
b. that significant changes in the level of interest rates, up and down, produces
losses for the investor.
c. that conventional mortgages have double the default risk than other types of
mortgages.
d. that investors are exposed to both interest rate risk and default risk.
a. the mortgage payment stays fixed for a time before it begins to vary with interest
rates.
b. hybrid ARMs guarantee the lender a fixed return and borrowers a fixed payment
for the life of the contract.
c. rates and house payments will vary quite frequently.
d. these mortgages are insured by the FHA.
a. seeking a rate lower than comparable fixed rates.
b. who may be selling their home soon.
c. seeking a fixed payment for a few years.
d. all of the above.
because
a. tax deductibility of interest for homeowners was reduced.
b. interest incurred under home equity lines was made tax deductible, but interest
on other household financing was not.
c. banks and savings and loans were given tax incentives to make home equity lines
of credit.
d. the law reduced the rates charged on home equity loans.
percent over the life of the mortgage). What will the mortgage rate be after three years if
the initial rate is 5%, and interest rates increase by 2% in each of the first three years of
the contract?
a. 6%
b. 7%
c. 8%
d. 9%
e. 10%
was to
a. make home loans to low income individuals.
b. purchase the conventional mortgages from thrift institutions.
c. purchase the insured conventional mortgages from financial institutions.
d. purchase the government insured mortgages from thrift institutions.
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(MBBs) compared to investing in direct mortgages?
a. MBBs are issued in standard denominations.
b. MBBs are issued by individuals with limited credit experience.
c. MBBs are usually insured and highly collateralized.
d. MBBs have cash flow returns similar to corporate bonds.
a. limit the size of the increase in the loan rate in any year.
b. limit the size of the increase in the loan rate over the life of the loan.
c. are required on all ARMs.
d. both a and b
e. all of the above
a. All fixed-rate mortgages have interest rate caps.
b. All adjustable-rate-mortgages have interest rate caps.
c. An interest rate cap on a mortgage reduces the lender’s interest rate risk
exposure.
d. Usually, an annual interest rate cap on a mortgage is 5%, and a lifetime cap is 1-
2%.
e. Both a and b are true.
a. have a much higher risk position than lower level tranches.
b. have more certain returns and less default-risk exposure.
c. wait until all tranches are paid before receiving a return.
d. have lower risk but a much more varied return than lower level tranches.
a. decreases; increases
b. increases; decreases
c. does not change; decreases
d. decreases; decreases
e. increases; increases
a. are likely to sell at lower prices and lower rates than comparable conventional
mortgages.
b. are less likely to default that conventional mortgages.
c. offer the investor less default risk than conventional mortgages.
d. will be written under the credit standards of the originator, and not the standards
of the agency or insurance company.
a. put
b. call
c. conversion
d. default
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a. default
b. interest rate
c. prepayment
d. both a and c
a. More time on the current job required.
b. An increase in the required loan/value ratio.
c. A decrease in the maximum total debt payments per month per amount of
monthly income.
d. Decreased maximums in the payment/income ratio of borrowers.
a. Increased down payments.
b. Increased loan/value ratios.
c. Decreased in maximum total debt to income ratios
d. Increased required use of mortgage insurance
e. All of the above
borrower?
a. income stability
b. job stability
c. prior credit history
d. all of the above
a. permanently fund mortgages
b. originate mortgages
c. service mortgages
d. collect monthly payments from borrowers
a. origination
b. funding
c. servicing
d. insuring
a. tend to vary with other rates.
b. tend to be higher than Treasury bond rates.
c. are becoming more uniform across the country.
d. all of the above.
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a. Low payments in initial years (10 to 15 years) – only includes interest on
borrowed amount.
b. Low payments in initial years (10 to 15 years) – only includes principal
repayment on borrowed amount.
c. After initial period, payments increase such that entire loan amount is amortized
by the end of 30 years.
d. None of the above is true.
a. Bridge financing is provided by lender over the time frame required by the
borrower to purchase land and construct the house.
b. Both interest and principal payments are made until construction is completed.
c. Loan is financed in increments as construction payments have to be made.
d. On completion of the construction, loan balance is rolled over into the type of
mortgage contract desired by borrower.
a. RAMs allow homeowners to borrow against the equity on their homes at low
rates.
b. Typically obtained by older people whose home loans have been paid off, but can
use income of the real estate investment they own.
c. Typical term is no more than 20 years and could be for borrower’s lifetime as an
annuity.
d. Homeowners’ equity declines by amount borrowed.
e. All of the above are true.
a. It is a traditional loan where interest is paid until the time when the principal is
due.
b. Terms can be 3, 5 or 7 years.
c. Loan is amortized over 15 or 30 year period so that monthly payments are no
different than an FRM of equal maturity.
d. Rate is variable over the contract term.
e. All of the above statements are true.
a. They are insured by the government.
b. They charge for their insurance.
c. They have low down payments.
d. The borrower is protected in case of default.
mortgage in which the annual interest rate is 5.85%. What is your monthly payment?
a. $1,215.27
b. $1,203.48
c. $1,194.45
d. $1,367.22
rate 6.25% annually. In addition to the principle and interest paid, you must pay 0.1% of
the house purchasing price per month into an escrow account for insurance and taxes.
What is the total monthly payment (to the nearest dollar)?
a. a $2,272
b. b $2,603
c. c $2,557
d. d $2,707
$2,812,500. The Company obtained a 30 year fixed rate mortgage at a 7.2%
annual rate and pay 20% down. After five years, the Company has excess
cash and decides to pay off the remaining balance. Due to several QEs in
the past years, the Company can obtain a mortgage of annual interest rates at
7%. How much must the Company pay to retire the mortgage (to the
nearest dollar)?
a. a $2,225,330
b. b $2,122,426
c. c $2,015,678
d. d $1,999,998
mortgage services?
a. a GNMA
b. b FNMA
c. c FHLMC
d. d FHFA
ESSAY QUESTIONS
1. Commercial banks and mortgage pools recently overtook thrift institutions as major investors in
mortgages. List and discuss several factors responsible for this change.
2. Explain the ways in which the federal government fostered the development of the secondary
mortgage markets.
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3. Why do mortgage-backed securities guaranteed by Federal government agencies often have
yields above U.S. Treasury bond rates?
4. List three ways in which a change in the rate of an adjustable-rate mortgage can affect the
borrower’s mortgage.
5. Mortgages are now originated, funded, serviced, and insured by different parties. What
developments are associated with this unbundling of loan cash flows in recent years?
6. In July 2006, Forrest purchased a town house at $325,000 and paid 25% down. The
mortgage that he obtained is a 30-year fixed-rate with an annual percentage interest rate
of 5.75%. In July 2011, due to the fall of interest rate, he decided to refinance and
obtained a mortgage at a 5.1% annual interest rate for 25 years. After he refinanced, how
many dollars of cash out-flow per month he could reduce from the new payment
schedule?