Question 1

Which is the oldest mortgage-backed security sponsoring agency?

Accepted Answer

A) GNMA. 
B) FNMA. 
C) FHA. 
D) FMHA. 
E) FHLMC. 
A) GNMA. 
B) FNMA. 
C) FHA. 
D) FMHA. 
E) FHLMC.

Question 2

All else equal, once a mortgage pool has aged, prior prepayments of mortgages in the pool have no bearing on the current value of the pool or the future prepayment rates of mortgages left in the pool.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following factors occurred in the early 2000s and created concerns about the ability of Fannie Mae and Freddie Mac to manage their portfolios of assets?

Accepted Answer

A) Fannie Mae miscalculated the value of its mortgages that created a restatement of its stockholder equity. 
B) Both agencies overcharged lenders for services they provided. 
C) Fannie Mae operated for some time with a sharp increase in interest rate risk on its balance sheet. 
D) All of the options. 
E) Both agencies overcharged lenders for services they provided, and Fannie Mae operated for some time with a sharp increase in interest rate risk on its balance sheet. 
A) Fannie Mae miscalculated the value of its mortgages that created a restatement of its stockholder equity. 
B) Both agencies overcharged lenders for services they provided. 
C) Fannie Mae operated for some time with a sharp increase in interest rate risk on its balance sheet. 
D) All of the options. 
E) Both agencies overcharged lenders for services they provided, and Fannie Mae operated for some time with a sharp increase in interest rate risk on its balance sheet.

Question 4

Early prepayments on mortgages backing a CMO are normally allocated to the earliest existing tranche maturity.

Accepted Answer

A) True 
 B)False

Question 5

One difference between a Special Purpose Vehicle (SPV) and a Structured Investment Vehicle (SIV) is that the

Accepted Answer

A) SIV can potentially earn an expected spread between its high-yielding assets and the relatively short-term, low cost funds that it borrows in addition to servicing fees. 
B) SPV retains ownership of the loans while the SIV sells the loans without recourse so the loan rights are transferred to the investor. 
C) SPV may have a line of credit or a loan commitment from the sponsoring institution if a loan goes bad and it cannot make payments to investors; the SIV has no such arrangement. 
D) SIV is just passing cash flows it receives through to the ultimate investor; the SPV has fixed payment obligations that must be met regardless of cash flows received on the loan portfolio. 
E) SPV is formed by depository institutions and the SIV is formed by non-depository institutions. 
A) SIV can potentially earn an expected spread between its high-yielding assets and the relatively short-term, low cost funds that it borrows in addition to servicing fees. 
B) SPV retains ownership of the loans while the SIV sells the loans without recourse so the loan rights are transferred to the investor. 
C) SPV may have a line of credit or a loan commitment from the sponsoring institution if a loan goes bad and it cannot make payments to investors; the SIV has no such arrangement. 
D) SIV is just passing cash flows it receives through to the ultimate investor; the SPV has fixed payment obligations that must be met regardless of cash flows received on the loan portfolio. 
E) SPV is formed by depository institutions and the SIV is formed by non-depository institutions.

Question 6

Which of the following is a source of prepayment risk on a typical FNMA mortgage-backed pass-through security?

Accepted Answer

A) Refinancing. 
B) Default risk. 
C) Housing turnover. 
D) Non-assumable mortgages. 
E) All of the options. 
A) Refinancing. 
B) Default risk. 
C) Housing turnover. 
D) Non-assumable mortgages. 
E) All of the options.

Question 7

One hundred identical mortgages are pooled together into a pass-through security.Each mortgage has a $150,000 principal, a fixed annual interest rate of 8 percent (paid monthly), and is fully amortized over a term of 30 years. For the first monthly payment, what portion is principal and what portion is interest?

Accepted Answer

A) $100,000 principal and $10,065 interest. 
B) $12,000 interest and no principal. 
C) $100,000 interest and no principal. 
D) $100,000 interest and $10,065 principal. 
E) $10,000 interest and $2,000 principal. 
A) $100,000 principal and $10,065 interest. 
B) $12,000 interest and no principal. 
C) $100,000 interest and no principal. 
D) $100,000 interest and $10,065 principal. 
E) $10,000 interest and $2,000 principal.

Question 8

One hundred identical mortgages are pooled together into a pass-through security.Each mortgage has a $150,000 principal, a fixed annual interest rate of 8 percent (paid monthly), and is fully amortized over a term of 30 years. What is the weighted average life of the above mortgage pool?

Accepted Answer

A) 30 years. 
B) 2 months. 
C) 1.998 months. 
D) 1 month. 
E) 1.5 months. 
A) 30 years. 
B) 2 months. 
C) 1.998 months. 
D) 1 month. 
E) 1.5 months.

Question 9

Identify the residual class of a CMO that gives the owner the right to any remaining collateral in the trust after all other bond classes have been retired plus any reinvestment income earned by the trust.

Accepted Answer

A) Class A bonds. 
B) Class B bonds. 
C) Class C bonds. 
D) Class Z bonds. 
E) Class R bonds. 
A) Class A bonds. 
B) Class B bonds. 
C) Class C bonds. 
D) Class Z bonds. 
E) Class R bonds.

Question 10

An FI funds a $5 million residential mortgage in 2017 by allocating capital and by issuing demand deposits.The mortgage represents a loan-to-value of 70 percent.The demand deposits have a reserve requirement of 10 percent and a deposit insurance premium of 23 basis points. What amount of demand deposits are needed to fund the mortgage?

Accepted Answer

A) $5,500,000. 
B) $400,000. 
C) $5,555,555. 
D) $500,000. 
E) $5,000,000. 
A) $5,500,000. 
B) $400,000. 
C) $5,555,555. 
D) $500,000. 
E) $5,000,000.

Question 11

It is advantageous for the residential mortgage holder to refinance because market interest rates on new mortgages are less than interest rates on existing mortgages.

Accepted Answer

A) True 
 B)False

Question 12

Prepayment risk means that realized cash flows on pass-through securities may be more than expected cash flows.

Accepted Answer

A) True 
 B)False

Question 13

CMOs are typically created from existing GNMA pass-through securities that are held in trust.

Accepted Answer

A) True 
 B)False

Question 14

A mortgage pass-through strip security is a special type of collateralized mortgage obligation (CMO).

Accepted Answer

A) True 
 B)False

Question 15

One hundred identical mortgages are pooled together into a pass-through security.Each mortgage has a $150,000 principal, a fixed annual interest rate of 8 percent (paid monthly), and is fully amortized over a term of 30 years. If the entire mortgage pool is repaid after the second month, what is the second month's (liquidating) principal and interest payments?

Accepted Answer

A) $99,933 interest and $14,989,935 principal. 
B) $100,000 interest and $10,065 principal. 
C) $100,000 interest and $15,000,000 principal. 
D) $99,933 principal and $14,989,935 interest. 
E) $12,000 interest and $138,000 principal. 
A) $99,933 interest and $14,989,935 principal. 
B) $100,000 interest and $10,065 principal. 
C) $100,000 interest and $15,000,000 principal. 
D) $99,933 principal and $14,989,935 interest. 
E) $12,000 interest and $138,000 principal.

Question 16

An interest-only (IO) mortgage pass-through strip has a claim on the present value of interest payments on the mortgages in a GNMA pool.

Accepted Answer

A) True 
 B)False

Question 17

The packaging of loans into asset pools and then selling portions of the pool to investors is known as

Accepted Answer

A) security creation. 
B) securitization. 
C) loan transfer. 
D) loan collateralization. 
E) mutual fund management. 
A) security creation. 
B) securitization. 
C) loan transfer. 
D) loan collateralization. 
E) mutual fund management.

Question 18

GNMA is a privately-owned entity.

Accepted Answer

A) True 
 B)False

Question 19

A commercial bank operating under an originate-to-distribute model is acting most like

Accepted Answer

A) an asset transformer. 
B) an asset broker. 
C) a portfolio lender. 
D) an asset accumulator. 
E) an investment bank. 
A) an asset transformer. 
B) an asset broker. 
C) a portfolio lender. 
D) an asset accumulator. 
E) an investment bank.

Question 20

In regard to a CMO, which of the following bonds have the shortest average life with a minimum of prepayment protection?

Accepted Answer

A) Class A bonds. 
B) Class B bonds. 
C) Class C bonds. 
D) Class Z bonds. 
E) Class R bonds. 
A) Class A bonds. 
B) Class B bonds. 
C) Class C bonds. 
D) Class Z bonds. 
E) Class R bonds.

Exam 27: Securitization

Which is the oldest mortgage-backed security sponsoring agency?

All else equal, once a mortgage pool has aged, prior prepayments of mortgages in the pool have no bearing on the current value of the pool or the future prepayment rates of mortgages left in the pool.

Which of the following factors occurred in the early 2000s and created concerns about the ability of Fannie Mae and Freddie Mac to manage their portfolios of assets?

Early prepayments on mortgages backing a CMO are normally allocated to the earliest existing tranche maturity.

One difference between a Special Purpose Vehicle (SPV) and a Structured Investment Vehicle (SIV) is that the

Which of the following is a source of prepayment risk on a typical FNMA mortgage-backed pass-through security?

One hundred identical mortgages are pooled together into a pass-through security.Each mortgage has a $150,000 principal, a fixed annual interest rate of 8 percent (paid monthly), and is fully amortized over a term of 30 years. What is the weighted average life of the above mortgage pool?

Identify the residual class of a CMO that gives the owner the right to any remaining collateral in the trust after all other bond classes have been retired plus any reinvestment income earned by the trust.

It is advantageous for the residential mortgage holder to refinance because market interest rates on new mortgages are less than interest rates on existing mortgages.

Prepayment risk means that realized cash flows on pass-through securities may be more than expected cash flows.

CMOs are typically created from existing GNMA pass-through securities that are held in trust.

A mortgage pass-through strip security is a special type of collateralized mortgage obligation (CMO).

An interest-only (IO) mortgage pass-through strip has a claim on the present value of interest payments on the mortgages in a GNMA pool.

The packaging of loans into asset pools and then selling portions of the pool to investors is known as

GNMA is a privately-owned entity.

A commercial bank operating under an originate-to-distribute model is acting most like

In regard to a CMO, which of the following bonds have the shortest average life with a minimum of prepayment protection?

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Fintech Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Filters