Chapter 11 The Mortgage Markets

11.1 Multiple Choice

1) Which of the following are important ways in which mortgage markets differ from
the stock and bond markets?
A) The usual borrowers in the capital markets are goernment entities and
businesses! whereas the usual borrowers in the mortgage markets are
indiiduals.
") Most mortgages are secured by real estate! whereas the ma#ority of capital
market borrowing is unsecured.
C) "ecause mortgages are made for different amounts and different maturities!
deeloping a secondary market has been more difficult.
$) All of the aboe are important differences.
%) &nly 'A) and '") of the aboe are important differences.
Answer( $
)) Which of the following are important ways in which mortgage markets differ from
stock and bond markets?
A) The usual borrowers in capital markets are goernment entities! whereas the
usual borrowers in mortgage markets are small businesses.
") The usual borrowers in capital markets are goernment entities and large
businesses! whereas the usual borrowers in mortgage markets are small
businesses.
C) The usual borrowers in capital markets are goernment entities and large
businesses! whereas the usual borrowers in mortgage markets are small
businesses and indiiduals.
$) The usual borrowers in capital markets are businesses and goernment entities!
whereas the usual borrowers in mortgage markets are indiiduals.
Answer( $
*) Which of the following are true of mortgages?
A) A mortgage is a long+term loan secured by real estate.
") A borrower pays off a mortgage in a combination of principal and interest
payments that result in full payment of the debt by maturity.
C) &er ,- percent of mortgage loans finance residential home purchases.
$) All of the aboe are true of mortgages.
%) &nly 'A) and '") of the aboe are true of mortgages.
Answer( $
1.)
.) Which of the following are true of mortgages?
A) A mortgage is a long+term loan secured by real estate.
") "orrowers pay off mortgages oer time in some combination of principal and
interest payments that result in full payment of the debt by maturity.
C) /ess than 01 percent of mortgage loans finance residential home purchases.
$) All of the aboe are true of mortgages.
%) &nly 'A) and '") of the aboe are true of mortgages.
Answer( %
1) Which of the following are true of mortgages?
A) 2rior to the 13)-s! 4.5. banking legislation discouraged mortgage lending by
banks.
") 6n the 13)-s! most mortgages were balloon loans! which re7uired the borrower
to pay the entire loan amount after three to fie years.
C) "ecause mortgages are long+term loans secured by real estate! mortgage
lenders tended to fail when land prices declined! as was often the case during
economic recessions.
$) All of the aboe are true.
%) &nly 'A) and '") of the aboe are true.
Answer( $
0) Which of the following is true of mortgage interest rates?
A) 6nterest rates on mortgage loans are determined by three factors( current longterm
markets rates! the term of the mortgage! and the number of discount
points paid.
") Mortgage interest rates tend to track along with Treasury bond rates.
C) The interest rate on 11+year mortgages is lower than the rate on *-+year
mortgages! all else the same.
$) All of the aboe are true.
%) &nly 'A) and '") of the aboe are true.
Answer( $
8) Which of the following are true of mortgages?
A) More than ,- percent of mortgage loans finance residential home purchases.
") The 9ational "anking Act of 1,0* rewarded banks that increased mortgage
lending.
C) Most mortgages during the 13)-s and 13*-s were balloon loans.
$) All of the aboe are true.
%) &nly 'A) and 'C) of the aboe are true.
Answer( %
1.*
,) Which of the following is true of mortgage interest rates?
A) /onger+term mortgages hae lower interest rates than shorter+term mortgages.
") Mortgage rates are lower than Treasury bond rates! because of the ta:deductibility
of mortgage interest rates.
C) 6n e:change for points! lenders reduce interest rates on mortgage loans.
$) All of the aboe are true.
%) &nly 'A) and '") of the aboe are true.
Answer( C
3) Which of the following is true of mortgage interest rates?
A) /onger+term mortgages hae higher interest rates than shorter+term mortgages.
") 6n e:change for points! lenders reduce interest rates on mortgage loans.
C) Mortgage rates are lower than Treasury bond rates because of the ta:
deductibility of mortgage interest payments.
$) All of the aboe are true.
%) &nly 'A) and '") of the aboe are true.
Answer( %
1-) Which of the following reduces moral ha;ard for the mortgage borrower?
A) Collateral
") $own payments
C) 2riate mortgage insurance
$) "orrower 7ualifications
Answer( "
11) Which of the following protects the mortgage lender<s right to sell property if the
underlying loan defaults?
A) A lien
") A down payment
C) 2riate mortgage insurance
$) "orrower 7ualification
%) Amorti;ation
Answer( A
1)) Which of the following is true of mortgage interest rates?
A) Mortgage rates are closely tied to Treasury bond rates! but mortgage rates tend
to stay below Treasury rates because mortgages are secured with collateral.
") /onger+term mortgages hae higher interest rates than shorter+term mortgages.
C) 6nterest rates are higher on mortgage loans on which lenders charge points.
$) All of the aboe are true.
%) &nly 'A) and '") of the aboe are true.
Answer( "
1..
1*) $uring the early years of an amorti;ing mortgage loan! the lender applies
A) most of the monthly payment to the outstanding principal balance.
") all of the monthly payment to the outstanding principal balance.
C) most of the monthly payment to interest on the loan.
$) all of the monthly payment to interest on the loan.
%) the monthly payment e7ually to interest on the loan and the outstanding
principal balance.
Answer( C
1.) $uring the last years of an amorti;ing mortgage loan! the lender applies
A) most of the monthly payment to the outstanding principal balance.
") all of the monthly payment to the outstanding principal balance.
C) most of the monthly payment to interest on the loan.
$) all of the monthly payment to interest on the loan
%) the monthly payment e7ually to interest on the loan and the outstanding
principal balance.
Answer( A
11) $uring the last years of a balloon mortgage loan! the lender applies
A) most of the monthly payment to the outstanding principal balance.
") all of the monthly payment to the outstanding principal balance.
C) most of the monthly payment to interest on the loan.
$) all of the monthly payment to interest on the loan.
%) the monthly payment e7ually to interest on the loan and the outstanding
principal balance.
Answer( $
10) $uring the early years of a balloon mortgage loan! the lender applies
A) most of the monthly payment to the outstanding principal balance.
") all of the monthly payment to the outstanding principal balance.
C) most of the monthly payment to interest on the loan.
$) all of the monthly payment to interest on the loan.
%) the monthly payment e7ually to interest on the loan and the outstanding
principal balance.
Answer( $
18) A borrower who 7ualifies for an =>A or ?A loan en#oys the adantage that
A) the mortgage payment is much lower.
") only a ery low or ;ero down payment is re7uired.
C) the cost of priate mortgage insurance is lower.
$) the goernment holds the lien on the property.
Answer( "
1.1
1,) '6) Conentional mortgages are originated by priate lending institutions! and
=>A
or ?A loans are originated by the goernment. '66) Conentional mortgages are
insured by priate companies! and =>A or ?A loans are insured by the goernment.
A) '6) is true! 6'6) is false.
") '6) is false! 6'6) is true.
C) "oth are true.
$) "oth are false.
Answer( "
13) "orrowers tend to prefer @@@@@@ to @@@@@@! whereas lenders prefer @@@@@@
A) fi:ed+rate loansA ABMsA fi:ed+rate loans.
") ABMsA fi:ed+rate loansA fi:ed+rate loans.
C) fi:ed+rate loansA ABMsA ABMs.
$) ABMsA fi:ed+rate loansA ABMs.
Answer( C
)-) '6) ABMs offer lower initial rates and the rate may fall during the life of the loan.
'66) Conentional mortgages do not allow a borrower to take adantage of falling
interest rates.
A) '6) is true! 6'6) is false.
") '6) is false! 6'6) is true.
C) "oth are true.
$) "oth are false.
Answer( A
)1) Crowing+e7uity mortgages 'C%Ms)
A) help the borrower pay off the loan in a shorter time.
") hae such low payments in the first few years that the principal balance
increases.
C) offer borrowers payments that are initially lower than the payments on a
conentional mortgage.
$) do all of the aboe.
%) do only 'A) and '") of the aboe.
Answer( A
))) A borrower with a *-+year loan can create a C%M by
A) simply increasing the monthly payments beyond what is re7uired and
designating that the e:cess be applied entirely to the principal.
") conerting his ABM into a conentional mortgage.
C) conerting his conentional mortgage into an ABM.
$) conerting his conentional mortgage into a C2M.
Answer( A
1.0
)*) Which of the following are useful for home buyers who e:pect their income to
rise
in the future?
A) C2Ms
") BAMs
C) C%Ms
$) 'A) and '")
%) 'A) and 'C)
Answer( %
).) Which of the following are useful for home buyers who e:pect their income to
fall
in the future?
A) C2Ms
") BAMs
C) C%Ms
$) 'A) and '")
%) 'A) and 'C)
Answer( "
)1) Betired people can lie on the e7uity they hae in their homes by using a
A) C%M.
") C2M.
C) 5AM.
$) BAM.
Answer( $
)0) 5econd mortgages sere the following purposes
A) they gie borrowers a way to use the e7uity they hae in their homes as
security for another loan.
") they allow borrowers to get a ta: deduction on loans secured by their primary
residence or acation home.
C) they allow borrowers to conert their conentional mortgages into C%Ms.
$) all of the aboe.
%) only 'A) and '") of the aboe.
Answer( %
)8) Which of the following is a disadantage of a second mortgage compared to credit
card debt?
A) The loans are secured by the borrower<s home.
") The borrower gies up the ta: deduction on the primary mortgage.
C) The borrower must pay points to get a second mortgage loan.
$) The borrower will find it more difficult to 7ualify for a second mortgage loan.
Answer( A
1.8
),) The share of the mortgage market held by saings and loans is appro:imately
A) 1- percent.
") .- percent.
C) )- percent.
$) 1- percent.
Answer( $
)3) The share of the mortgage market held by commercial banks is appro:imately
A) 1- percent.
") )1 percent.
C) 11 percent.
$) 1 percent.
Answer( "
*-) A loan+sericing agent will
A) package the loan for an inestor.
") hold the loan in their inestment portfolio.
C) collect payments from the borrower.
$) 'A) and 'C).
%) '") and 'C).
Answer( C
*1) $istinct elements of a mortgage loan include
A) origination.
") inestment.
C) sericing.
$) all of the aboe.
%) only '") and 'C).
Answer( $
*)) The =ederal 9ational Mortgage Association '=annie Mae)
A) was set up to buy mortgages from thrifts so that these institutions could make
more loans.
") funds purchases of mortgages by selling bonds to the public.
C) proides insurance for certain mortgage contracts.
$) all of the aboe.
%) only 'A) and '") of the aboe.
Answer( %
**) The =ederal >ousing Administration '=>A)
A) was set up to buy mortgages from thrifts so that these institutions could make
more loans.
") funds purchases of mortgages by selling bonds to the public.
C) proides insurance for certain mortgage contracts.
$) all of the aboe.
%) only 'A) and '") of the aboe.
Answer( C
1.,
*.) @@@@@@@ issues participation certificates! and @@@@@@@@ proides federal
insurance
for participation certificates.
A) =reddie MacA =reddie Mac
") =reddie MacA Cinnie Mae
C) Cinnie MaeA =reddie Mac
$) Cinnie MaeA Cinnie Mae
%) =reddie MacA no one
Answer( %
*1) B%M6Cs are most like
A) =reddie Mae pass+through securities.
") Cinnie Mae pass+through securities.
C) participation certificates.
$) collaterali;ed mortgage obligations.
Answer( $
*0) Cinnie Mae
A) insures 7ualifying mortgages.
") insures pass+through certificates.
C) insures collaterali;ed mortgage obligations.
$) 'A) and '").
%) '") and 'C).
Answer( "
*8) Mortgage+backed securities
A) hae been growing in popularity in recent years as institutional inestors look
for attractie inestment opportunities.
") are securities collaterali;ed by a pool of mortgages.
C) are securities collaterali;ed by both insured and uninsured mortgages.
$) all of the aboe.
%) only 'A) and '") of the aboe.
Answer( $
*,) The most common type of mortgage+backed security is
A) the mortgage pass+through! a security that has the borrower<s mortgage
payments pass through the trustee before being disbursed to the inestors.
") collaterali;ed mortgage obligations! a security which reduces prepayment risk.
C) the participation certificate! a security which passes the borrower<s mortgage
payments e7ually among all the owners of the certificates.
$) the securiti;ed mortgage! a security which increases the li7uidity of otherwise
illi7uid mortgages.
Answer( A
1.3
11.) TrueD=alse
1) $own payments are designed to reduce the likelihood of default on mortgage loans.
Answer( TB4%
)) $iscount points 'or simply points) are interest payments made at the beginning
of a loan.
Answer( TB4%
*) 2riate mortgage insurance is a policy that guarantees to make up any discrepancy
between the alue of the property and the loan amount! should a default occur.
Answer( TB4%
.) $uring the early years of the loan! the lender applies most of the payment to the
principal on the loan.
Answer( =A/5%
1) &ne important adantage to a borrower who 7ualifies for an =>A or ?A loan is the
ery low interest rate on the mortgage.
Answer( =A/5%
0) Ad#ustable+rate mortgages generally hae lower initial interest rates than do
fi:edrate
mortgages.
Answer( TB4%
8) Mortgage interest rates loosely track interest rates on three+month Treasury bills.
Answer( =A/5%
,) An adantage of a graduated+payment mortgage is that borrowers will 7ualify for a
larger loan than if they re7uested a conentional mortgage.
Answer( TB4%
3) 9early half the funds for mortgage lending come from mortgage pools and trusts.
Answer( TB4%
1-) Many institutions that make mortgage loans do not want to hold large portfolios
of
long+term securities! because it would sub#ect them to unacceptably high interestrate
risk.
Answer( TB4%
11) A problem that initially hindered the marketability of mortgages in a secondary
market was that they were not standardi;ed.
Answer( TB4%
11-
1)) Mortgage+backed securities hae declined in popularity in recent years as
institutional inestors hae sought higher returns in other markets.
Answer( =A/5%
1*) Mortgage+backed securities are marketable securities collaterali;ed by a pool of
mortgages.
Answer( TB4%
11.* %ssay
1) >ow has the modern mortgage market changed oer recent years?
)) %:plain the features of mortgage loans that are designed to reduce the likelihood of
default.
*) What are points? What is their purpose?
.) >ow does an amorti;ing mortgage loan differ from a balloon mortgage loan?
1) %aluate the adantages and disadantages! from both the lender<s and the
borrower<s perspecties! of fi:ed+rate and ad#ustable+rate mortgages.
111