University of San Carlos - Main Campus

ACCTG 509

Chapter 7

True/False Questions

1)The largest category of mortgages by dollar volume is multi-family mortgages.  

2. A mortgage is a loan backed by real property.  

3. Approximately 60% of residential mortgages are now securitized.  

4. The secondary market for mortgages influences the accept/reject decision in originally granting a mortgage.

5. Federally insured mortgages are called conventional mortgages.  

6. The duration of a balloon payment mortgage is less than the duration of a fully amortized 30 year fixed rate mortgage.

7. A borrower using a conventional mortgage will have to put up at least a 20% down payment or purchase private mortgage insurance.

8. Discount points are paid to reduce the down payment required.  

9. The required down payment on a FHA Loan can be as small as 3%.  

10. A common rule of thumb is to not refinance your mortgage unless interest rates decline by at least 2 1/2%.

Multiple Choice Questions

11. Rank the following types of mortgages by amount outstanding from largest to smallest.

0. 1. Home mortgages
   2. Multifamily mortgages
1. I, II, III, IV
2. I, II, IV, III

3. II, I IV, III
4. IV, II, III, I

4. 3. Farm mortgages
   4. Commercial mortgages
5. I, IV, II, III

12. The process of packaging and/or selling mortgages which are then used to back publicly traded debt securities is called

1. Collateralization
2. Securitization
3. Market

capitalization

4. Stock diversification
5. Mortgage

globalization

13. A                 placed against mortgaged property ensures that the property cannot be sold (except by the lender) until the mortgage is paid off.

1. Collateral
2. Lien

3. Habeas corpus
4. Down payment

5. Writ of certiorari

14. If a borrower makes a 20% down payment on a conventional mortgage they will be required to obtain

1. FHA insurance
2. VA insurance
3. Private mortgage

insurance

4. GNMA payment guarantees

5. None of the above

15. Mortgage payments are                 on a 15 year fixed rate mortgage than on a 30 year fixed rate mortgage, and                                      is paid on a 15 year mortgage than on a 30 year mortgage, ceteris paribus

1. Lower; less interest
2. Lower; less principal

3. Higher; less interest
4. Higher; more principal

5. Higher; more interest

16. With a fixed rate mortgage the                   bears the interest rate risk and with an ARM the                                                                          bears the interest rate risk.

1. Borrower; lender
2. Borrower; borrower

3. Lender; lender
4. Lender; borrower

5. Federal government; pool organizer

17. The schedule showing how monthly mortgage payments are split into principle and interest is called a(an):

A) Securitization schedule                                                                          B) Balloon payment schedule

3. Graduated payment schedule
4. Amortization schedule

5. Growing equity schedule

18. You purchase a $200,000 house and you pay 20% down. The interest rate is 7% and there are 360 monthly payments. What is the monthly payment?

A) $1,330.61

B) $1,074.49

C) $1,064.48

D) $1,327.34

E) $933.33

19. A borrower took out a 30 year fixed rate mortgage of $130,000 at an 8% annual rate. After five years, he wishes to pay off the remaining balance. Interest rates have by then fallen to 7%. How much must he pay to retire the mortgage (to the nearest dollar)?

A) $134,963

B) $118,657

C) $72,766

D) $123,591

E) $114,042

20. A homeowner could take out a 15 year mortgage at a 6.5% annual rate on a $125,000 mortgage amount, or she could finance the purchase with a 30 year mortgage at a 7.0% annual rate. How much total interest over the entire mortgage periods could she save by financing her home with the 15 year mortgage (to the nearest dollar)?

A) $103,387

B) $140,625

C) $92,457

D) $113,786

E) $77,899

Use the following to answer questions 21-22:

A homeowner can obtain a $150,000 thirty year fixed rate mortgage at a rate of 7.5% with zero points or at a rate of 7.0% with 2 points.

21. If you will keep the mortgage for 30 years, what is the net present value of paying the points (to the nearest dollar)?

A) $18,313

B) $13,667

C) $7,646

D) $5,631

E) $4,646

22. How long must the owner stay in the house to make it worthwhile to pay the points if the payment saving is invested monthly?

1. 5,40 years
2. 3.33 years

3. 6.04 years
4. 4.91 years

5. More than 30 years

23. A                 may be used by a borrower who wants to pay off a mortgage more quickly than a standard mortgage.

1. Second mortgage
2. GPM

3. ARM
4. Automatic Rate

Reduction Mortgage

5. GEM

24. A                 is used to purchase a more expensive home than for which the borrower could otherwise qualify.

1. Second mortgage
2. GPM

3. ARM
4. Automatic Rate

Reduction Mortgage

5. GEM

25. A                 mortgage is primarily used when interest rates are high in order to allow borrowers who could not otherwise obtain mortgages to do so.

1. SAM
2. RAM

3. GEM
4. ARM

5. Automatic Rate Reduction Mortgage

26. A                 is used to help retired people receive monthly income in exchange for the equity in their home.

1. SAM
2. Equity Participant

Mortgage

3. RAM

4. PLAM
5. GEM

27. Which of the following statements about mortgage markets is/are true?

1. 1. Mortgage companies service more mortgages than they originate.
   2. Servicing fees typically range from 2% to 4%.

1. 3. Most mortgage sales are with recourse.
   4. The government is involved in the residential mortgage markets.

1. I, III and IV only
2. II, III and IV only

3. I, II and IV only
4. II and III only

5. I and IV only

28. Which of the following statements about GNMA is/are true?
    1. GNMA provides timing insurance.
    2. GNMA creates pools of mortgages and issues securities.
    3. GNMA insures only FHA, VA and FmHA loans.
    4. GNMA requires that all mortgages in the pool have the same interest rate.

1. I, II , III and IV are true
2. I, III and IV only
3. I, II and III only
4. II, III and IV only
5. III and IV only

29. A $25,000 face value GNMA pass-through quote sheet lists a spread to average life of 103, PSA of 220, and a price of 101-09. This means that
    1. The pass-through yield is 103 basis points above the comparable maturity Treasury bond
    2. The pass-through is being prepaid more quickly than normal
    3. The pass-through is priced at $25,272.50

1. I, II and III are correct
2. I and II only
3. I and III only
4. II and III only
5. III only

30. The advantage of a CMO to an investor over a pass-through is

1. The CMO increases the predictability of the period over which cash flows will be received
2. The CMO reduces credit risk
3. The CMO is not taxable and the pass- through is taxable
4. CMO rates of return are guaranteed
5. All of the above

31. An IO holder benefits from              than expected prepayments, and a PO holder benefits from lower than expected                            .

1. Lower; prepayments
2. Higher;

prepayments

3. Lower; interest rates
4. Higher; interest rates
5. None of the above

32. A MBB differs from a CMO or a pass-through in that
    1. The MBB does not result in the removal of mortgages from the balance sheet.
    2. A MBB holder has no prepayment risk.
    3. Cash flows on a MBB are not directly passed through from mortgages.

1. I, II and III
2. I and II only
3. II and III only
4. I and III only
5. I only