Deck 27: Securitization

Question 1

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

Answer 1

False

Question 2

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

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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.

Question 5

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

Question 6

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

Question 7

Securitization of assets increases the FI's capital requirements.

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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 18

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 19

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

Question 20

GNMA is a privately-owned entity.

Question 21

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

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

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

Question 24

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 25

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 26

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

Question 27

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

Question 28

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

Question 29

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

Question 30

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

Question 31

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 32

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

Question 33

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 34

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

Question 35

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 36

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

Question 37

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

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

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 40

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

Question 41

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 42

The prepayment model developed by the Public Securities Association is an empirically based model that reflects an average rate of prepayment based on the past experience of pools of FHA-insured mortgages

Question 43

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 44

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 45

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

Question 46

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 47

Which of the following are reasons that the actual prepayment rate on a specific mortgage pool backing a specific pass-through security may differ from PSA's assumed pattern?

A)age of the mortgage pool and the size of the pool
B)geographic location and assumability of mortgages in the pool
C)age and job status of mortgagees in the pool
D)level of the pool's coupon relative to the current mortgage coupon rate
E)all of the above are reasons

Question 48

A bond sold to investors whose cash flows reflect the monthly interest payments received from a pool of mortgages is referred to as an OI strip.

Question 49

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

Question 50

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

Question 51

In constant prepayment rates (CPRs), the prepayment speed of the security in question is constant or, the timing of the prepayments doesn't adhere to defined patterns.

Question 52

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

Question 53

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 54

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 55

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

Question 56

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 57

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 58

Which of the following are not considered a simplifying assumption indicative of the restrictive nature of the option model approach and the option-adjusted spread?

A)The only reasons for prepayment are due to refinancing mortgages at lower rates; there is no prepayment for turnover reasons.
B)The current discount (zero-coupon) yield curve for T-bonds is flat.
C)The mortgage coupon rate is 10% on an outstanding pool of mortgages with an outstanding principal balance of $1 million.
D)Mortgage loans are fully amortized, and there is no servicing fee.
E)The interest rate movements over time change a maximum of 10% up or down each year and the time path of interest rate does not follow a binomial process.

Question 59

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

Question 60

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

Question 61

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 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 62

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 63

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 options.
E)Sponsors mortgage-backed securities programs by FIs such as banks, thrifts, and mortgage bankers and acts as a guarantor to investors in mortgage-backed securities regarding the timely pass-through of principal and interest payments on their sponsored bonds.

Question 64

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 65

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 66

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 options are directly involved.

Question 67

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 options.

Question 68

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 69

Which of the following statements is true regarding Special Purpose Vehicles (SPVs) and structured investment vehicles (SIVs)?

A)An SPV has no contingent credit risk when it sells asset-backed securities (ABS) with recourse to investors.
B)An SPV retains the rights to the loans that are used as collateral in an asset-backed security.
C)An SIV potentially has more liquidity risk than the sponsoring FI due to the short-term nature of the liabilities and their reliance on short-term funds.
D)An SPV is allowed to accept deposits while the SIV must rely solely on other borrowings.
E)An SIV is not a lucrative or profitable as an SPV.

Question 70

When FIs form off-balance sheet subsidiaries to remove assets from their balance sheet, the subsidiary activities

A)are regulated as though they are part of the parent institution.
B)occur beyond the reach of existing state and federal monitoring and regulation.
C)are monitored and regulated by the Securities and Exchange Commission (SEC).
D)are reported to the National Association of Securities Dealers (NASD).
E)must follow the Bank for International Settlements (BIS) capital adequacy standards.

Question 71

Which of the following is the more traditional form of off-balance sheet subsidiary for removing loans from the FIs balance sheet?

A)Special Purpose Vehicle (SPV)
B)Asset-Backed Structure (ABS)
C)Structured Investment Vehicle (SIV)
D)Collateralized Mortgage Operation (CMO)
E)Mortgage Backed Subsidiary (MBS)

Question 72

The life span of an SPV (Special Purpose Vehicle) is limited to

A)the life of the sponsoring FI.
B)the duration of its liabilities.
C)the life of the asset-backed security that it created from the loans in its portfolio.
D)the life is unlimited as it can exist beyond its initial purpose.
E)the duration the Federal Reserve determines.

Question 73

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 74

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 75

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 76

As of 2015, the amount of mortgage-backed securities outstanding was approximately

A)$2.9 trillion.
B)$5.1 trillion.
C)$7.8 trillion.
D)$11.0 trillion.
E)$15.0 trillion.

Question 77

Which is the oldest mortgage-backed security sponsoring agency?

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

Question 78

One difference between a special purpose vehicle (SPV) and a structured investment vehicle (SIV) is

A)there is no difference; these are just two different names for the same type of subsidiary.
B)the SPV has stockholders that share in the profits; the SIV only has debt.
C)the SIV ceases to exist when the loans in its portfolio cease to exist; the SPV outlives its loan portfolio.
D)the SPV is allowed to accept deposits while the SIV must rely solely on other borrowings.
E)the SIV raises funds first and then acquires loans from the sponsoring FI; the SPV receives the loans first and creates an asset-backed security which it sells and transfers the funds back to the sponsoring FI.

Question 79

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

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 80

Which of the following 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 options.