Exam (elaborations)
REE 4204 Chapter 13 Quiz (1)
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REE 4204 Chapter 13 Quiz (1)
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REE 4204 Chapter 13 QuizWith a secondary mortgage market, agency problems are best controlled by the mortgage
lenders in the primary market. - ANS-False
Collateralized mortgage obligations (CMOs) rearrange the cash flows from a pool of mortgages
into different bond classes called tranches. - ANS-True
Mortgage prepayment decreases the uncertainty of the timing of mortgage cash flows since the
cash flows are received earlier. - ANS-False
Fannie Mae (FNMA) was created in 1938 for the purpose of buying FHA loans. - ANS-True
Freddie Mac was established in 1970. - ANS-True
Rating agencies such as S&P or Moody's do not consider the likelihood of prepayment when
they rate mortgage-backed bonds. - ANS-False
An active secondary mortgage market increases lenders' reliance on deposits as a source of
funds for writing mortgages. - ANS-False - it decreases reliance on deposits
Credit enhancement means that the MRS will have less default risk than the underlying
mortgages. - ANS-True
Credit enhancement is accomplished in a mortgage-backed bond issue by overcollateralization.
- ANS-True
Fannie Mae and Freddie Mac create a secondary mortgage market by selling mortgages to the
U.S. Treasury. - ANS-False
Historically, the lack of homogeneity increased the illiquidity of mortgages. - ANS-True
A mortgage pay-through bond is what the market commonly refers to as a mortgage
pass-through security. - ANS-False
Ginnie Mae neither purchases mortgages nor issues securities. - ANS-True
Freddie Mac (FHLMC) has historically been a heavy purchaser of FHA and VA loans -
ANS-False
Secondary mortgage market participants are indifferent concerning the issue of double taxation
of income. - ANS-False
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