ch. 9 Finance 122

1. Mortgage backed securities are commonly contained within collateralized debt obligations. true
2. Federally insured mortgages guarantee loan repayment to the lending financial institution
3. At a given point in time, the interest rate offered on a new fixedrate mortgage is typically ____ the initial interest rate offered on a new adjustablerate mortgage. above
4. An institution that originates and holds a fixedrate mortgage is adversely affected by ____ interest rates; the borrower who was provided the mortgage is adversely affected by ____ interest rates. increasing; decreasing
5. Rates for adjustablerate mortgages are commonly tied to the average treasury bill rate over the previous year
6. Caps on mortgage rate fluctuations with adjustablerate mortgages (ARMs) are typically 2 percent per year and 5 percent for the mortgage lifetime
7. From the perspective of the lending financial institution, interest rate risk is lower on a 15-year fixed-rate mortgage than on a 30 year fixed-rate mortgage
8. Mortgage companies specialize in originating mortgages and selling those mortgages
9. For any given interest rate, the shorter the life of the mortgage, the ____ the monthly payment and the ____ the total payments over the life of the mortgage. greater; lower
10. A financial institution has a higher degree of interest rate risk on a ____ than a ____. 30-year fixed-rate mortgage; 15- year fixed-rate mortgage
11. A balloonpayment mortgage requires interest payments for a 10 to 20year period, at the end of which the borrower must pay the full amount of the principal. false
12. Use an amortization schedule. A 15year $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. 1,014; 750
13. A mortgage that requires interest payments for a three to fiveyear period, then full payment of principal, is a(n) balloon payment mortgage
14. In an amortization schedule of monthly mortgage payments interest payments exceeds principal payments early on
15. A mortgage with low initial payments that increase over time without ever leveling off is a growing- equity mortgage
16. 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. higher than; behind
17. 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? shared-appreciation mortgage
18. 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. graduated payment mortgage
19. Mortgage companies, commercial banks and savings institutions are the primary originators of mortgages. true
20. ____ was created in 1968 as a corporation that is wholly owned by the federal government. It guarantees payment on mortgages that meet specific criteria. Ginnie Mae
21. “Securitization” refers to the private insurance of conventional mortgages. false
22. A financial institution may service a mortgage even after selling it. true
23. The difference between the 30year mortgages rate and the 30year Treasury bond rate is primarily attributable to credit risk
24. Mortgage prices would normally be expected to ____ when the interest rates ____, holding other factors constant. increase; decrease
25. Collateralized mortgage obligations (CMOs) are generally perceived to have a high degree of prepayment risk
26. Mortgage prices are subject to interest rate risk, credit risk, and prepayment risk
27. During a weak economy, the credit risk to a financial institution from investing in mortgage backed securities representing subprime mortgages is ____ than that of mortgage backed securities representing prime mortgages. more than
28. ____ are backed by conventional mortgages. private-label pass-through securities
29. Which of the following is not a guarantor of federally insured mortgages? the Federal Deposit Insurance Corporation (FDIC)
30. ____ economic growth will probably ____ the risk premium on mortgages and ____ the price of mortgages. weak; decrease; increase
31. 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. graduated payment
32. The adjustable rate mortgage creates uncertainty for the ____ profit margin, but reduces the uncertainty for the ____. borrowers; originator
33. When financial institutions originate residential mortgages, the mortgage contract should not specify the mortgage contract should specify all of the above
34. Which of the following is not a common type of mortgagebacked security according to your text? balloon payment mortgage certificates
35. ____ risk is the risk that a borrower may prepay the mortgage in response to a decline in interest rates. prepayment
36. Mortgage backed securities are assigned ratings by: rating agencies
37. In a collateralized mortgage obligation (CMO), mortgages are segmented into ____ (or classes). tranches
38. The credit crisis is mostly attributed to the use of: liberal criteria applied by mortgage originators
39. Fannie Mae and Freddie Mac experienced financial problems during the credit crisis because they: invested heavily in subprime mortgages
40. ____ mortgages enabled more people with relatively lower income, or high existing debt, or a small down payment to purchase homes. subprime
41. The secondary mortgage market that accommodates originators of mortgages who desire to sell their mortgages before maturity. true
42. Regardless of what happens to market interest rates, most adjustablerate mortgages (ARMs) specify a maximum allowable fluctuation in the mortgage rate per year and over the mortgage life. true
43. Some adjustablerate mortgages (ARMs) contain an option clause that allows mortgage holders to switch to a fixedrate mortgage within a specified period. true
44. Mortgage lenders normally charge a higher initial interest rate on adjustable rate mortgages than on fixedrate mortgages. false
45. A balloonpayment mortgage requires interest payments for a three to fiveyear period. At the end of this period, full payment of the principal (the balloon payment) is required. true
46. During the early years of a mortgage, most of the monthly payment reflects principal. false
47. Mortgages are rarely sold in the secondary market. false
48. An increase in either the riskfree rate or the risk premium on a fixedrate mortgage results in a higher required rate of return when investing in the mortgage and therefore causes mortgage prices to decrease. true
49. 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. false
50. The higher the level of equity invested by the borrower, the higher the probability that the loan will default. false
51. Borrowers who have a lower level of income relative to the periodic loan payments are more likely to default on their mortgages. true
52. Non U.S. financial institutions never hold mortgages on U.S. property. false
53. The ____ market accommodates originators of mortgages that desire to sell their mortgages prior to maturity. secondary
54. 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. interest rate
55. From the perspective of the lending financial institution, there is a ____ degree of interest rate risk for ____maturity mortgages. higher; longer and lower; shorter
56. During the early years of a mortgage, most of the monthly payment reflects interest
57. Which of the following will typically require homeowners to ultimately request a new mortgage? balloon- payment mortgage
58. Which of the following is not true with respect to a growingequity mortgage? it involves payment that level off after the first five to ten years of the mortgage
59. ____ economic growth will probably ____ the risk premium on mortgages and ____ the price of mortgages. weak; decrease; increase
60. The probability that a borrower will default (credit risk) is influenced by all of the following, except credit risk is affected by all the above
61. In a short sale of a home: the lender allows the homeowners to sell the home for less than what is owed on the mortgage; and the lender does not recover the full amount on the mortgage
62. An investor in interestonly collateralized mortgage obligations (CMOs) would not be concerned that homeowners will prepay the underlying mortgages. false
63. The valuation of mortgagebacked securities is difficult because of limited transparency. true
64. A(n) _________ problem occurs when a person or institution does not have to bear the full consequence of its behavior and therefore assumes more risk than it otherwise would. moral hazard
65. A __________ is a privately negotiated contract that protects investors against the risk of default on particular debt securities such as mortgagebacked securities. credit default swap
66. Speculators sell credit default swaps to benefit from the default of specific subprime mortgages. false

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