Exam 4

Question 1

Fannie Mae

Answer 1

Federal National Mortgage Association

Question 2

Freddie Mac

Answer 2

Federal Home Loan Corporation

Question 3

Private

Answer 3

• for profit

- publicly-traded

Question 4

Public

Answer 4

• charged with providing liquidity to residential mortgage markets; in particular in low-income, historically underserved areas.
• their bonds are classified as “government securities”

Question 5

swap programs

Answer 5

originators (banks)

• mortgages for MBS
• securitize, private credit guarantee

Question 6

Cash programs

Answer 6

originators (banks)

• Mortgages for money
• Hold MBSs and mortgages as assets

Question 7

Source of Funding

Answer 7

Investors

• bonds for money
• raise funds to purchase mortgages and MBSs

Question 8

Cash programs (SMI)

Answer 8

Secondary market institutions

• MBSs for money
• Hold MBSs and mortgages as assets

Question 9

Securitization

Answer 9

ex. 100 mortgages promising $100,000 of payments each.
- Each mortgage has 50 percent change of default
- expected value is $50,000; risk is HIGH

Question 10

secondary markets

Answer 10

GOOD

• allow for short-term savers to fund long-term loans
• increased liquidity means less risk; more people willing to lend
• allow for foreign savers to fund domestic home borrowing

Question 11

Asymmetric information problems

Answer 11

• lenders typically have less/worse information
• adverse selection problems
• agency (moral hazard) problems

Question 12

Adverse selection problems (who)

Answer 12

Originators (banks)

when bad credit risks are the most likely to seek out loans, even at high interest rates.

Question 13

Agency problems (who)

Answer 13

Investors

when borrowers incentives are not aligned with those of the lender.

Question 14

Community Reinvestment Act

Answer 14

regulators should “consider” whether a federal insured bank was serving the needs of its “community”

Question 15

Federal Housing Enterprises Financial Safety and Soundness Act

Answer 15

required HUD to establish affordable housing goals for the GSEs

Question 16

CRA reformed to strengthen housing goals

Answer 16

HUD allows Fannie and Freddie to purchase subprime MBSs to fulfill their affordable housing goals.

Question 17

Fed adopts “recourse rule”

Answer 17

• capital requirements for banks
• $10 for every $100 in commercial loans
• $5 for every $100 in mortgages
  $2 for every $100 in GSE backed MBSs

Question 18

Stimulus policy

Answer 18

increases AD

- monetary and fiscal

Question 19

fiscal policy

Answer 19

• increases and decreases in taxes or government spending

- taxes dec. disposable incomes inc. consumption inc.

Question 20

monetary policy

Answer 20

• increases and decreases in the money supply

- money inc. interest rates dec. imports inc.

Question 21

money supply

Answer 21

generally accepted currency

• dollars, coins, checking accounts
• NOT gold

Question 22

liquidity

Answer 22

the ease and quickness with which an asset can be converted into purchasing power

Question 23

Monetary base (MB)

Answer 23

currency + deposits at federal reserve

Question 24

M1

Answer 24

currency + checkable (demand) deposits

Question 25

M2

Answer 25

M1 + traditional savings deposits + small time deposits + retail money market mutual funds

Question 26

the fed exercises control over the MB by

Answer 26

• open market operations

- discount loans

Question 27

open market operations

Answer 27

occur when the fed buys or sells bonds

Question 28

discount loans

Answer 28

loans made by the fed to private banks