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					                      19: The Mortgage Market

1. Bundling together somewhat heterogeneous financial instruments based on assets that
   belong together only through some crudely common characteristics and then creating
   original new instruments collateralized by the income streams expected from these
   disparate assets is: (a) disparatization. (b) leveraging. (c) coupling. (d) securitization.
   (e) optioning.
2. Across your lifetime, your interest costs for mortgages are likely to be lowest on
   homes you buy as you experience increases in your income and changes in your
   employment, if you: (a) avoid interest rate risk by always borrowing with a
   conventional mortgage. (b) buy homes only if the sellers already have mortgages
   outstanding that permit you to assume their loans. (c) accept interest rate risk by
   taking out a adjustable rate mortgages [ARMs]. (d) pay off your balloon mortgages
   and refinance your debt whenever the market interest rate declines.
3. Monthly payments on a conventional mortgage are: (a) decreased steadily as the
   amount of the principal owed is reduced. (b) initially heavily weighted as interest
   payments, and then interest payments decline and retirement of the principal
   accelerates as more and more fixed monthly payments are made. (c) unamortized.
   (d) higher the longer the term of the mortgage.
4. A “piggy-back” mortgage is a single transaction that: (a) requires a cosigner
   before the mortgage loan is authorized. (b) bundles first and second mortgages,
   with the second mortgage being used to cover a normal down payment. (c)
   authorizes the lender to factor the mortgage in a securitized pass-through. (d)
   provides needed retirement income for elderly homeowners who have
   accumulated significant home equity. (e) combines a conventional mortgage with
   an adjustable rate mortgage.

5. Mortgage loans made to homeowners with credit records that are less than
   excellent and which consequently generate relatively high rates of interest are
   collectively known as: (a) sub-prime lending. (b) redlined loans. (c) rationed
   credit (d) speculative loans. (e) default risk loans.

6. The lowest interest rates available on loans to private individuals tend to be those
   for mortgage loans. Reasons for this do not include: (a) loan guarantees by quasi-
   governmental agencies. (b) the deductibility of mortgage interest from taxable
   income. (c) the bundling of mortgage-backed securities. (d) significant collateral
   in the form of property liens.

7. Techniques mortgage lenders use to guard against default risk by homeowners do
   not include: (a) PMI. (b) reserve accounts. (c) a lien. (d) a down payment.

8. Piggy-back mortgages became increasingly common after roughly 2001 because:
   (a) computerized records increasingly enable mortgage lenders to “qualify”
   potential borrowers at lower transaction costs. (b) baby boomers are starting to
    retire and many of them need increased retirement income. (c) historically low
    interest rates have encouraged lenders to take greater risks. (d) adjustable rate
    mortgages shift interest rate risk from the lender to the borrower.

9. If interest rates fall and this lowers mortgage payments so that homebuyers can
   afford to buy more expensive houses, the predictable increase in housing prices is
   most directly a symptom of: (a) capitalization. (b) a speculative bubble in the
   housing market. (c) national economic prosperity. (d) securitization. (e) rational
   expectations and efficient markets.
10. Interest rate risk is shifted from lenders to borrowers when: (a) the yield curve for
    bonds becomes steeper. (b) new home buyers take out adjustable rate mortgages.
    (c) financial markets adjust to lower rates of inflation per the Fisher effect. (d) the
    yield curve for bonds becomes flatter. (d) relatively illiquid and heterogeneous
    financial instruments are securitized.

11. Not among common ways for mortgage lenders to protect against losses from
    potential defaults entails requiring: (a) liens. (b) co-signers for all mortgages. (c)
    down payments. (d) private mortgage insurance. (e) that borrowers meet
    qualification standards.

12. If the interest rate on a mortgage is tied to some market interest rate and changes
    periodically, the home buyer has a mortgage that is: (a) an adjustable rate
    mortgage [ARM]. (b) interest flexible. (c) conventional. (d) ballooned.
13. Discount points (points) are charged at the beginning of a mortgage loan as
    interest payments. In exchange for the discount points, the lender: (a) raises the
    interest rate depending on the correlation between the amount of points and the
    amount of the loan paid at closing. (b) reduces the interest rate applied on the
    loan. (c) raises or reduces the interest rate applied on the loan. (d) is able to evade
    truth-in-lending laws.

14. A college graduate who recently entered the workforce and expects to move up
    the ranks rapidly would be least likely to finance a newly-bought home with a/an:
    (a) shared-appreciation mortgage [SAM]. (b) reverse annuity mortgage [RAM].
    (c) graduated-payment mortgage. (d) adjustable rate mortgage [ARM]. (e) equity
    participation mortgage. (f) conventional 30-year mortgage. (g) balloon mortgage.
15. Balloon mortgages: (a) allow the interest rates for the loan to vary up and down,
    but only to a previously set high and low. (b) are not offered to customers
    anymore. (c) were one reason many borrowers defaulted on their loans in the
    1980s. (d) are one of the most popular used mortgage loans today.

16. A legal claim against a piece of property that gives a lender the right to foreclose
    or seize a property if a loan secured by the asset is not repaid as promised is called
    a: (a) limit order. (b) loan fund. (c) lien. (d) liability. (e) recapture agreement.
17. A lending institution can place a lien against a property to: (a) allow the lender to
    sell the piece of property if the loan defaults and is not paid. (b) allow the
   borrower be granted more predetermined, specified time to pay the loan. (c) to
   give the borrower the right to pay in installments. (d) allow the lender to change
   the terms of the agreement if need be.

18. A publicly held record that gives title of the property to the lending institution in
    the event of a default on loan payments is most commonly known as: (a)
    collateral. (b) default title. (c) lien. (d) foreclosure.

19. Lenders conventionally required home buyers to make a substantial down
    payment before authorizing a mortgage primarily because these down payments:
    (a) are treated as a sunk cost by the home buyer. (b) require borrowers to prove
    that they have some personal savings to devote to purchase of a home, reducing
    adverse selection before a mortgage is granted, and reducing moral hazard after
    the mortgage is granted. (c) reduce the term to maturity. (d) reduce the average
    monthly payment.

20. Lenders frequently try to protect themselves from defaults on home loans by
    requiring borrowers to purchase: (a) default insurance. (b) private mortgage
    insurance. (c) home loan insurance. (d) term mortgage insurance. (e) title
21. Mechanisms that mortgage lenders can legally require to protect themselves
    against default do not include: (a) down payments and cosigners. (b) liens. (c)
    private mortgage insurance. (d) redlining and restrictive covenants.

22. Mortgage contracts originated by banks and other mortgage lenders that are not
    guaranteed by the FHA or the VA (though often insured by private mortgage
    insurance) are usually: (a) conventional mortgages. (b) insured mortgages. (c)
    fixed-rate mortgages. (d) adjustable-rate mortgages (ARMs).

23. Mortgage loans are not characterized by: (a) investors holding the loan. (b) the
    borrower setting the interest rate and monthly payment. (c) the servicing agent
    handling the paperwork. (d) the originator packaging the loan for the investor.

24. Not among the distinct elements of most mortgage loans would be that the: (a)
    originator packages the loan for an investor. (b) servicing agent handles the
    paperwork. (c) investor holds the loan. (d) borrower pays off the loan only at
25. Though often insured by private mortgage insurance, mortgage contracts
    originated by banks or other mortgage lenders that are not guaranteed by the FHA
    or the VA are commonly referred to as: (a) conventional mortgages (b) insured
    mortgages (c) fixed-rate mortgages (d) adjustable-rate mortgages (ARMs). (e)
    institutional mortgages.
26. A liquidity (Keynesian) effect associated with a newly adopted contractionary
    monetary policy will harm a borrower most if a recent mortgage loan is: (a)
    conventional. (b) 30 years instead of 15. (c) adjustable rate [ARM]. (d)
    “ballooned” at the end of 8 years.
27. Interest rate risk is born most heavily by the homebuyer if the loan is: (a) a longer
    (30-year) conventional mortgage. (b) an adjustable rate mortgage. (c) a shorter
    (15-year) conventional mortgage. (d) “ballooned” so that full repayment is
    required at the end of eight years.

28. Interest rate risk falls most heavily on financial intermediaries and the ultimate
    lenders [savers] when a real estate buyer has a mortgage contract that: (a) is an
    unassumable conventional mortgage. (b) is an adjustable rate mortgage [ARM]
    (c) has a balloon payment in, say, 10 years. (d) entails a reverse annuity mortgage
    [RAM]. (e) is an assumable conventional mortgage.

29. A mortgage with a clause allowing a third party buyer to take over a current
    mortgage at the previous fixed interest rate is called: (a) a conventional mortgage. (b)
    an adjustable rate mortgage. (c) an outsider collateralized mortgage. (d) an assumable
    conventional mortgage. (e) deferred risk mortgage.

30. Interest rate risk is born most heavily by lenders if a mortgage is: (a) (c)
    graduated-payment mortgage (b) a longer (30-year) conventional mortgage. (c) an
    adjustable rate mortgage. (d) a reverse annuity mortgage [RAM]. (e) a shared-
    appreciation mortgage [SAM]. (f) “ballooned” so that full repayment is required
    at the end of eight years.
31. The reasoning behind a lender making a buyer put a down payment on a house
    and then lending the down payment back to them as a second mortgage is that: (a)
    the down payment assures that the buyer has some initial funding. (b) most
    homeowners are too uninformed to realize they are simply borrowing the money
    they just paid. (c) piggyback loans are excessively risky. (d) this is a way for a
    bank to lend more funds and generate more interest income.

32. A mortgage loan in which only interest is paid initially, followed by a large
    payment of the principal at maturity is known as: (a) a conventional mortgage. (b)
    a balloon mortgage. (c) an ARM mortgage. (d) a RAM mortgage.

33. A mortgage allowing retirees to draw equity out of their home in the form of a
    monthly withdrawal while they are still living but which requires full payment
    upon the death of the borrower is a/an. (a) adjustable rate mortage [ARM]. (b)
    growing-equity mortgage [GEM]. (b) shared-appreciation mortgage [SAM].. (c)
    equity participation mortgage [EPM]. (d) reverse annuity mortgage [RAM].
34. The creative response that allows retired people to borrow against the equity of
    their homes is known as: (a) an ARM loan. (b) a RAM loan. (c) a MRA loan. (d)
    a Fannie Mae. (e) a Freddie Mac.

35. RAM mortgages are increasingly popular as a consequence of demographic
    trends. RAM stands for: (a) retirement assurance mortgage. (b) revised
    amortization mortgage. (c) reverse annuity mortgage. (d) reformed actuarial
36. The tax deductibility of mortgage interest tends to cause: (a) heavier reliance on debt
    to finance purchases of family homes. (b) overinvestment in family homes, from the
    perspective of the overall economy, relative to other forms of economic investment.
    (c) significant reliance on second mortgages to finance non-home expenditures. (d)
    tax structures to be slightly relatively less progressive than they otherwise would be.
    (e) all of the above.
37. If you were going to buy a new car a major disadvantage of paying for the car by
    taking out a second mortgage on your home instead of borrowing from a finance
    company (e.g., GMAC or Ford Financial) is that a second mortgage: (a) usually
    entails a higher interest rate. (b) will cause a proportional reduction in the value of
    your property. (c) increases the total liens against your home because your home is
    the collateral. (d) makes it harder to pay off your first mortgage on an accelerated
    basis. (e) increases the total amount of tax you pay because property taxes are often
    based on the total of the mortgages on a home.

38. Major advantages of taking out a second mortgage to fund the purchase of a new
    car instead of borrowing from a finance company include the fact that interest
    paid to the finance company is not: (a) deductible when you calculate taxable
    income. (b) subject to “truth-in-lending” laws. (c) as low, primarily because
    finance companies often pay kickbacks to reward car dealers for channeling
    business to them. (d) secured by a lien on your home.

39. The major reason to use a secondary mortgage loan to finance a large purchase
    such as a new automobile is that: (a) a higher line of credit is achieved by using a
    home for collateral. (b) mortgage interest is tax deductible. (c) interest rates on
    cars are significantly lower than any other loans. (d) mortgages have more
    flexible terms and longer monthly payment options.

40. The secondary market for mortgages was created by the: (a) Federal Home Loan
    Bank Board. (b) Freddie Mac. (c) Fanny May. (d) U.S. Veterans Administration.
    (e) none of the above.
41. The most common types of mortgage-backed securities are: (a) mortgage pools.
    (b) mortgage pass-throughs. (c) bankers acceptances. (d) mortgage bonds.

42. On CNN at 7:26am this morning [March 28, 2008], Treasury Secretary Henry Paulson
    asserted that well over 90% of all homeowners were making their mortgage payments
    regularly, with no particular problems, but conceded that defaults had roughly
    doubled, to about 2% of all mortgage borrowers. If this is true, the most likely
    predictable consequences would include: (a) increases in mortgage interest rates of
    about one nominal percent, or one point. (b) violent eruptions in conflicts between the
    central government of Iraq and insurgents led by Muqtada Al Sadr. (c) declines in the
    value of the dollar. (d) bankruptcy for numerous mortgage lenders, starting with Bear-
    Sterns. (e) increased instability in the Social Security Trust Fund.
43. If the Federal Reserve System raises its target interest rates and through a domino
    effect, mortgage interest rates rise, there is likely to be a decrease in the: (a) rent
    charged for apartments near college campuses. (b) demand for housing. (c) rates
   of retirement of current middle-aged homeowners. (d) supply of housing. (e)
   mobility of migrant farm labor between different agricultural regions.
44. Recent examples of the securitization of assets include the rapid growth of: (a)
    mortgage backed securities. (b) internet banking. (c) debit cards. (d) household
    credit card debt.

45. The collateralized loans owed by US households do not include: (a) variable
    interest rate mortgages on homes. (b) education loans. (c) second mortgages on
    homes. (d) auto loans. (e) conventional mortgages.

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