Deck 25: The Residential Mortgage Market

Question 1

When a loan is based solely on the credit of the borrower and on the collateral for the mortgage, the mortgage is said to be a:

A) Fixed-rate mortgage.
B) Adjustable rate mortgage.
C) Conventional mortgage.
D) Guarantee.
E) None of the above.

Answer 1

Conventional mortgage.

Question 2

Mortgage insurance to provide a guarantee for the fulfillment of the borrower's obligations is provided by the:

A) Federal Housing Administration.
B) Veterans Administration.
C) Rural Housing Service insurance.
D) PMI insurance.
E) a, b, and c only.

Answer 2

a, b, and c only.

Question 3

The principal originators of residential mortgage loans are:

A) Life insurance companies.
B) Thrifts.
C) Commercial banks.
D) Mortgage bankers.
E) b, c, and d only.

Answer 3

b, c, and d only.

Question 4

Mortgage originators may generate income from mortgage activity in the form of:

A) Origination fees.
B) Secondary market profits.
C) Servicing fees.
D) a and b only.
E) All of the above.

Question 5

The two principal factors in determining whether or not to lend funds are the:

A) Loan-to-value ratio.
B) Payment-to-income ratio.
C) Times-interest-earned ratio.
D) a and b only.
E) b and c only.

Question 6

A commitment letter is sent to the applicant:

A) When the lender guarantees the funds.
B) When the lender decides to lend the funds.
C) When the lender has found suitable property for purchase.
D) a and b only.
E) All of the above.

Question 7

The mortgage originator has several choices as to the mortgages acquired including:

A) Holding the mortgages in a portfolio.
B) Selling the mortgages to investors.
C) Using the mortgages as collateral for the issuance of a security.
D) a and b only.
E) All of the above.

Question 8

A mortgage loan that meets an agency's underwriting standards is referred to as a:

A) Conforming mortgage.
B) Nonconforming mortgage.
C) Conventional mortgage.
D) Nonconventional mortgage.
E) None of the above.

Question 9

The risk(s) associated with originating mortgages include(s):

A) Price risk.
B) Fallout risk.
C) Pipeline risk.
D) All of the above.
E) a and b only.

Question 10

Fallout risk is the risk that:

A) The value of the pipeline will be adversely affected if mortgage rates rise.
B) Applicants will not complete the transaction by purchasing the property with the funds borrowed from the mortgage originator.
C) Those who were issued commitment letters will not close.
D) b and c only.
E) All of the above.

Question 11

The traditional type of mortgage is characterized by:

A) A fixed rate.
B) Level, nominal, payment.
C) Full amortization.
D) a and b only.
E) All of the above.

Question 12

Traditional mortgages were financed mainly by depository institutions with very short-term funds, even though a mortgage is a very long-term instrument. This mismatch of maturities was solved with the:

A) Adjustable-rate mortgage.
B) Graduated-payment mortgage.
C) Balloon mortgage.
D) Reverse mortgage.
E) Growing equity mortgage.

Question 13

In the presence of inflation-driven high interest rates, mortgage repayment in real terms is no longer level, but instead starts high and ends low, shutting off many would-be-borrowers. This problem is referred to as:

A) Pipeline risk.
B) Mismatch problem.
C) Tilt problem.
D) Maturity problem.
E) Inflation problem.

Question 14

Mortgage designs, which have been offered to solve the tilt problem include the:

A) Graduated-payment mortgage.
B) Price-level-adjusted mortgage.
C) Dual-rate mortgage.
D) All of the above.
E) None of the above.

Question 15

A growing-equity mortgage:

A) Does have negative amortization.
B) Has an adjustable-rate mortgage whose monthly mortgage payments increase over time..
C) Has a fixed-rate mortgage whose monthly mortgage payments increase over time.
D) Effectively shortens the life of the mortgage.
E) c and d only.

Question 16

A mortgage design that is created for senior homeowners who want to convert their home equity into cash is the.

A) Convertible mortgage.
B) Reverse mortgage.
C) Traditional mortgage.
D) Growing-equity mortgage.
E) Subprime loans.

Question 17

By investing in mortgage loans, investors face:

A) Credit risk.
B) Liquidity risk.
C) Price risk.
D) Prepayment risk.
E) All of the above.

Question 18

Mortgage loans tend to be rather illiquid because:

A) There is no secondary market.
B) They are large.
C) They are irreversible.
D) They are indivisible.
E) b and d only.

Question 19

The effect of the prepayment right is that the cash flows from a mortgage is not known with certainty. This uncertainty is called:

A) Cash flow risk.
B) Prepayment risk.
C) Marketability risk.
D) Price risk.
E) Credit risk.

Question 20

The commitment letter states that, for a fee, the applicant has the right but not the obligation to require the lender to provide funds at a certain interest rate and on certain terms.

Question 21

A mortgage is a pledge of property to secure payment of a debt.

Question 22

Credit risk can be reduced if the mortgage is federally or privately insured.

Question 23

Commercial properties are income-producing properties.

Question 24

Explain the deficiencies of the traditional mortgage loan.

Question 25

Describe the risks associated with investing in mortgages.