Deck 26: Securitization

Question 1

Individual mortgage loans in a pool sponsored by FNMA or FHLMC must be non-assumable if the property is sold.

Answer 1

True

Question 2

The availability of a liquid secondary market for asset-backed securities provided an incentive for FIs to follow an originate-to-distribute strategy of loan origination.

Answer 2

True

Question 3

GNMA is more active in the market for mortgage pass-through securities than either FNMA or FHLMC.

Answer 3

False

Question 4

The securities that form a GNMA pass-through are U.S. Treasury bonds, bills, and notes.

Question 5

FNMA does not hold the mortgages it purchases on its balance sheet, thereby transferring credit and default risk to investors purchasing its securities.

Question 6

Unlike GNMA, FNMA will securitize conventional mortgages issued by depository institutions.

Question 7

When a Special Purpose Vehicle (SPV) creates asset-backed securities, the SPV retains ownership of the original assets.

Question 8

GNMA helps create pass-through asset-backed securities by providing timing insurance.

Question 9

Securitization of assets increases the FI's capital requirements.

Question 10

The three government agencies that sponsor the creation of mortgage-backed, pass through securities are: GNMA, FNMA, and FDIC.

Question 11

Investors in a Structured Investment Vehicle (SIV) have no direct right to the cash flows on the underlying portfolio of the SIV.

Question 12

On September 7, 2008, FNMA and FHLMC were placed under conservatorship and both are controlled by a federal government agency.

Question 13

GNMA will sponsor any pool of loans regardless of the size of each individual loan in the pool.

Question 14

The life of a Structured Investment Vehicle (SIV) is not tied to any particular asset class that it is responsible for securitizing.

Question 15

Depository institutions have followed and originate-to-distribute model of loan origination only since the Financial Services Modernization Act of 1999.

Question 16

FNMA securitizes conventional mortgage loans as well as FHA/VA insured loans.

Question 17

GNMA is a privately-owned entity.

Question 18

Historically, FNMA has had a secured line of credit with the U.S. Treasury.

Question 19

FNMA supports only those pools of mortgages that comprise mortgage loans whose default or credit risk is insured by one of three government agencies.

Question 20

Despite the complexity of measuring the risk of asset-backed securities, credit rating agencies continued to use their own measures to quantify risks involved.

Question 21

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

Question 22

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.

Question 23

One advantage of asset securitization to a bank is the ability to originate new assets before the original assets have matured.

Question 24

One cause of residential mortgage prepayment risk is the sale of the mortgaged property.

Question 25

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.

Question 26

Full amortization of a thirty-year fixed rate mortgage means that monthly payments are equal and include both principal and interest.

Question 27

A bad news effect of increased mortgage prepayments on a mortgage pool caused by decreasing market interest rates includes a reduction in the discount rate on the mortgage cash flow.

Question 28

GNMA pass-throughs can assist an FI in resolving duration mismatch and illiquidity risk problems.

Question 29

A good news effect of increased mortgage prepayments on a mortgage pool caused by decreasing market interest rates includes the receipt of fewer scheduled interest payments.

Question 30

Prepayment models are attempts by professional mortgage portfolio managers to estimate the rate of prepayment on given mortgage pools.

Question 31

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

Question 32

Current statistics show that the servicing fee depository institutions can earn by securitizing through GNMA approximates 44 basis points.

Question 33

The call option held by the residential mortgage holder is in the money when market interest rates are less than the interest rate on an existing mortgage.

Question 34

Investors in GNMA pass-through securities are exposed to the risk that the originating bank may fail, and the risk that the trustee may mismanage monthly interest and principal payments collected.

Question 35

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

Question 36

All tranches in a collateralized mortgage obligation (CMO) have the same prepayment risk exposure.

Question 37

GNMA pass-through bondholders can be protected against default risk by FHA/VA housing insurance.

Question 38

The ability to refinance a mortgage with no prepayment penalty gives the borrower a long-term put option on interest rates.

Question 39

The weighted-average life of a loan is always greater than the duration of the loan.

Question 40

Mortgage pools that are assumed to prepay at a rate of speed that is more rapid than the PSA model would indicate, are said to prepay at less than 100 percent PSA behavior because the mortgage life and balance will exist for a longer time.

Question 41

A principal-only (PO) mortgage pass-through strip security is attractive to investors that wish to increase the interest rate sensitivity of their portfolio.

Question 42

Most mortgage-backed bond issues conducted by depository institutions are under-collateralized.

Question 43

Certificates of Amortizing Revolving Debts are asset-backed securities that have a claim on automobile installment loans.

Question 44

The value of an interest-only (IO) mortgage-backed strip is not sensitive to changes in current market interest rates.

Question 45

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

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

Question 46

The discount effect and the prepayment effect are negatively correlated in their impact on the value of a principal-only (PO) mortgage-backed strip security.

Question 47

Which type of loans are securitized most often?

A)Residential mortgages.
B)Credit card loans.
C)Auto loans.
D)Student loans.
E)Commercial and industrial (C&I) loans.

Question 48

An interest-only (IO) mortgage-backed strip is a rare example of a negative duration asset.

Question 49

The creation and sale of CMOs is based, at least in part, on the ability to segment the market for pass-through security products.

Question 50

Which of the following is not accomplished by securitization of assets?

A)Increases the liquidity of assets.
B)Provides a new source of funds.
C)Increases the costs of monitoring.
D)Decreases the duration of assets.
E)Decreases the costs of regulation.

Question 51

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.

Question 52

A principal only (PO) mortgage-backed strip is attractive to investors who wish to speculate about decreasing interest rates.

Question 53

As of 20, the amount of mortgage-backed securities outstanding was approximately

A)$2.9 trillion.
B)$5.1 trillion.
C)$7.9 trillion.
D)$11.0 trillion.
E)$15.0 trillion.

Question 54

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

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

Question 55

Mortgage-backed bonds differ from CMOs and pass-through securities in that there is no direct link between the cash flows on the mortgages and the interest and principal payments on the bonds.

Question 56

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

Question 57

Which of the following assets have not been securitized by FIs?

A)Mortgages.
B)Credit card receivables.
C)Auto loans.
D)Debts of Lesser Developed Countries (LCD debt).
E)Student loans.

Question 58

At market rates substantially below the mortgage coupon rate of an interest-only (IO) mortgage-backed strip, the prepayment effect will dominate the discount effect resulting in a decrease in the price of the IO strip.

Question 59

Mortgage-backed bonds are a form of on-balance-sheet securitization.

Question 60

Which of the following is a primitive form of asset securitization?

A)Loan sales.
B)Pass-through security.
C)Collateralized mortgage obligation.
D)Mortgage-backed bond.
E)Timing insurance.

Question 61

A claim to the present value of the interest payments made by the mortgage holders in a GNMA pool is

A)a CARS.
B)an IO strip.
C)a CARD.
D)a PO strip.
E)a prepayment claim.

Question 62

Servicing a pass-through security refers to

A)an FI processing of all payments.
B)an FI provision of clearing services to set up the pass-through.
C)broker/dealer services provided by the FI to the ultimate holders of the pass-through.
D)guarantee by the FI of all principal and interest payments.
E)an FI provision of liquidity services to the ultimate holders of the pass-through.

Question 63

Which of the following good news and bad news effect is NOT true when mortgage interest rates decline, resulting in faster repayments?

A)Lower market yields reduce the discount rates on any mortgage cash flows and increase the present value of any given stream of cash flows (good news effect).
B)Low yields lead to faster prepayment of the mortgage pool's principal (good news effect).
C)With early prepayments comes fewer interest payments in absolute terms (bad news effect).
D)Faster cash flows due to prepayments can only be reinvested at lower interest rates (bad news effect).
E)Faster cash flows due to prepayments can be reinvested at higher interest rates (good news effect).

Question 64

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

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

Question 65

Which of the following is an example of a negative duration asset that is valuable as a portfolio-hedging device for an FI manager when included with regular bonds whose price-yield curves show the normal inverse relationship.

A)PO strip.
B)IO strip.
C)Class B bonds
D)Class Z bonds
E)Class A bonds

Question 66

The Government National Mortgage Association

A)is a private corporation owned by shareholders.
B)purchases pools of mortgages originated by FIs.
C)provides timing insurance to investors in mortgage-backed securities.
D)only approves conventional and FHA/VA insured mortgages.
E)was the first agency to securitize residential mortgages.

Question 67

Which is the oldest mortgage-backed security sponsoring agency?

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

Question 68

Which of the following are functions of GNMA?

A)Engaging in swap transactions where it swaps mortgage-backed securities with an FI for original mortgages.
B)Sponsors mortgage-backed securities programs by FIs such as banks, thrifts, and mortgage bankers.
C)Acts as a guarantor to investors in mortgage-backed securities regarding the timely pass-through of principal and interest payments on their sponsored bonds.
D)All of the above.
E)Answers B and C only.

Question 69

Mortgage-backed bonds (MBB) differ from pass-throughs and CMOs in which of the following ways?

A)The MBB bondholders have a junior claim to assets of the FI.
B)There is no direct link between the cash flow on the mortgages backing the bond and the interest and principal payments on the MBB.
C)The assets backing a MBB issue are normally removed from the balance sheet of the FI.
D)Tranches of a MBB are treated equally with respect to prepayments on mortgages backing the bond issue.
E)None of the above.

Question 70

Which of the following best explains the term burn-out factor?

A)The percent of mortgage contract that is transferred from the seller to the buyer of a house.
B)The required interest spread of a pass-through security over a treasury when prepayment risk is taken into account.
C)The aggregate percent of the mortgage pool that has been prepaid prior to the month under consideration.
D)A mortgage-backed bond issued in multiple classes or tranches.
E)Bonds collateralized by a pool of assets.

Question 71

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?

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 above.
E)Answers B and C only.

Question 72

Investors in mortgage-backed pass-through securities are exposed to a variety of risks. Compared to other fixed-income securities, the most unique of these risks is

A)prepayment risk
B)default risk
C)credit risk
D)interest rate risk
E)liquidity risk

Question 73

The characteristics of a Collateralized Mortgage Obligation (CMO) securities issue include all of the following EXCEPT

A)the tranches will have different coupon rates.
B)the CMO securities are insured separately from the GNMA pass-through securities.
C)the principal payments are made totally to the earliest remaining tranche.
D)GNMA pass-through securities are used as collateral in a trust to support the CMOs.
E)the CMO securities are split into different tranches or groupings.

Question 74

Which of the following is NOT a factor that may cause the prepayment risk on a pool of mortgages to differ from the PSA's assumed pattern?

A)The age of the mortgage pool.
B)Geographic location.
C)Seasons in the year in which the mortgage was originated.
D)Full or partial amortization of the payments.
E)Assumability of mortgages in the pool.

Question 75

On September 7, 2008, both FHMA and FHLMC were placed under conservatorship by the

A)Federal Reserve.
B)Federal Housing Finance Agency.
C)Federal Deposit Insurance Corporation.
D)Federal Home Loan Bank.
E)Comptroller of the Currency.

Question 76

Which of the following government agencies or government-sponsored enterprises are NOT directly involved in the creation of mortgage-backed pass-through securities?

A)Government National Mortgage Association.
B)Farmers Home Administration.
C)Federal National Mortgage Association.
D)Federal Home Loan Mortgage Corporation.
E)All of the above are directly involved.

Question 77

Which of the following is an incentive to securitize mortgage assets?

A)To reduce the regulatory tax burden on the FI.
B)To adjust the gap exposure of the FI.
C)To improve the liquidity of the FI.
D)To generate non-interest sensitive fee income.
E)All of the above.

Question 78

All else equal, advantages of a DI operating as an asset broker in regard to mortgages includes all of the following EXCEPT

A)lower regulatory taxes.
B)increased fee-based income.
C)increased liquidity.
D)decreased asset and liability duration mismatch.
E)increased capital requirements.

Question 79

Which of the following is true concerning an assumable mortgage?

A)The aggregate percent of the mortgage pool that has been prepaid prior to the month under consideration.
B)The mortgage contract is transferred from the seller to the buyer of a house.
C)The required interest spread of a pass-through security over a treasury when prepayment risk is taken into account.
D)A mortgage-backed bond issued in multiple classes or tranches.
E)Bonds collateralized by a pool of assets.

Question 80

What is defined as the sum of the products of the time when principal payments are received and the amount of principal received all divided by total principal outstanding?

A)Weighted-average life.
B)Burn-out factor.
C)Degree of collateralization.
D)Option-adjusted spread.
E)Time to maturity.