The Basics of Finance 2 Flashcards
Why are loans considered a risk?
A: Default Risk
B: Interest Rate Risk
C: Delayed Payment Risk
D: All Of The Above
D: All Of The Above
the secondary market
The secondary loans market, in which existing loans are bought and sold. Many people buy and sell loans, typically in large packages. The goal is to ensure that lenders have enough capital to be able to continue providing loans.
the market for debt
Demand is lenders who want to lend (who want to buy debt). Supply is borrowers who want to borrow (who want to sell debt). As price moves up, interest rates fall. However, if lots of people want to borrow money, supply goes up, price goes down, and interest rates go up.
interest rates and real estate
When interest rates rise, the number of people purchasing homes (or the size of the homes they buy) goes down.
Who buys debt?
There are large sources of capital looking for a wide variety of assets, such as pensions, other large institutional resources (university endowments), and private money. One of the easiest ways for them to get exposure to real
estate as an asset class is to buy mortgages.
loan risk
Loan owners must take into account specific types of risks, even though mortgages have collateral.
default risk
The risk of not being paid. A rising market covers default risk, because a homeowner can sell the property in that market and make the lender whole.
interest risk
The risk that interest rates will go up and
devalue the current, lower-interest loan.
delayed payment risk
The risk of payment being deferred, which is a risk because the delay of receiving money lowers the overall value of the investment.
prepayment risk
The risk that a loan will be paid off early or otherwise refinanced at a lower interest rate, reducing the value that the investor would receive from interest.
underwriter
The role of the underwriter is to make sure that the loan is assembled in such a way and that the documentation and appropriate information is there so that when they put that loan into a pool of other mortgages it meets basic criteria.
underwriter
Underwriters must be sure that there is a complete file and that that file meets the criteria for investors in the secondary
market who are purchasing those loans.
They determine if the buyer has the capacity to repay the loan, that it is more than likely that they will be able to continue their payments in a timely manner. They are also examining the collateral to make sure that the property
actually exists.
direct lender
Someone who is making a loan directly to the consumer, with the intent to hold at least a
portion of that loan in their investment.
institutional lender
Buyers of loans on the secondary market. Lenders looking to provide capital to others who are working through the origination/underwriting process.
Why does your lender want to sell your loan?
Most lenders either specialize in originating loans or holding loans long-term. It takes a tremendous amount of capital to hold
loans.
prime loan
Loans to borrowers who meet specific lending criteria that qualify them as a higher credit quality for a lender. Typically associated with
conventional or conforming loans.
conforming loan
A mortgage loan that conforms to GSE (Fannie Mae and Freddie Mac) guidelines, such that it can be purchased on the secondary debt
market.
subprime loan
Loans to borrowers who do not have a strong credit history and are not considered as low of a credit risk. This refers to the credit quality of the borrower, rather than being a specific,
separate product.
Happy Co. Mortgage wants to sell mortgages. In which of the following markets will they most likely sell them?
A: Hard Money Market
B: Primary Mortgage Market
C: Secondary Mortgage Market
D: Federal Reserve Market
C: Secondary Mortgage Market
Another name for a “conventional” loan is a(n):
A: FHA Loan
B: VA Loan
C: Subprime Loan
D: Conforming Loan
D: Conforming Loan
Federal National Mortgage Corporation
Known as FNMA or Fannie Mae, an organization started to create a market to help loans move more smoothly. Its primary purpose is to provide liquidity for first government-backed loans (such as FHA and VA loans), and because of it, loans are more affordable. A government-sponsored
enterprise (GSE).
Government National Mortgage Corporation
Known as GNMA or Ginnie Mae, established to ensure timely payments for FHA and VA loans so that they would be more attractive investments.
Federal Home Loan Mortgage Corporation
Known as FHMLC or Freddie Mac, an entity that buys mortgages on the secondary market, pools them, and sells them as a mortgage-backed security to investors. A government-sponsored enterprise (GSE).
Secondary mortgage market consists of
A: FNMA
B: FHMLC
C: GMNA
D: All Of The Above
D: All Of The Above
The acronym for “Fannie Mae” is:
A: FNMA
B: FHA
C: FHMLC
D: GNMA
A: FNMA
The acronym for “Freddie Mac” is:
A: FNMA
B: FHA
C: FHMLC
D: GNMA
C: FHMLC
A conventional loan would most likely be purchased by:
A: Fannie Mae
B: Ginnie Mae
C: FHA
D: VA
A: Fannie Mae
A government loan would most likely be purchased by:
A: Farmer Mac
B: Ginnie Mae
C: FHA
D: VA
B: Ginnie Mae
Generally, bonds which are secured by the pledge of specific assets are called _________
A: Mortgage Bonds
B: Loan Bonds
C: Collateral Bonds
D: None Of The Above
A: Mortgage Bonds
mortgage backed bond
A secondary market product that uses mortgage loans to issue a bond. Used to
raise capital to issue more loans.
pass through security
A secondary market product that passes principal and interest payments to the
holder. An equity interest in the loan.
mortgage pay through bond
A secondary market product issued like a mortgage backed bond but pays like a pass
through security.
collateralized mortgage obligation
A secondary market product that is a fixed income security that uses mortgage-backed securities as collateral. It is subdivided into graduated risk classes so that investors can more easily determine how much risk they
want to take on.
discounting a loan
Lenders sometimes sell a loan at a discount if circumstances have changed. For example, if the credit rating has decreased, it is no longer worth as much as it was. This applies to the secondary market, not to the original loan
agreement.
Federal Reserve System
The central bank of the United States (not government-owned). It conducts monetary policy by influencing money and credit conditions. It also maintains the stability of
the financial system.
federal funds rate
The federal funds target rate is set by the governors of the Federal Reserve, which they enforce by open market operations and adjustments in the interest rate on reserves. They intervene by influencing the rate at which banks are lending to one another. This impacts
short-term interest rates, not long-term rates.
discount rate
The interest rate charged to commercial banks and other depository institutions for loans received from the Federal Reserve’s
discount window.
discount window
An instrument of monetary policy that allows eligible institutions to borrow money from the central bank, usually on a short-term basis, to
offset temporary shortages of liquidity.
reserve requirement
A central bank regulation that sets the minimum amount of reserves that must be
held by a commercial bank.
Loan Prospector
Freddie Mac’s automatic underwriting
technology.
Desktop Underwriter
Fannie Mae’s automatic underwriting technology. It provides lenders a comprehensive credit risk assessment that determines whether a loan meets Fannie
Mae’s eligibility requirements.
The SAFE Act
Known as the Secure and Fair Enforcement for Mortgage Licensing Act, this legislature mandates a nationwide licensing and registration system for residential mortgage loan originators. The SAFE Act requires that federal registration and state licensing and registration be accomplished through the Nationwide Mortgage Licensing System and Registry.
Nationwide Mortgage Licensing System and Registry
The system of record for non-depository financial services licensing or registration in
participating state agencies.
The entity that has the power to raise or lower the discount rate is:
A: Fannie Mae
B: Freddie Mac
C: Ginnie Mae
D: The Federal Reserve
D: The Federal Reserve
The entity that oversees the Federal Reserve is:
A: The President Of The United States
B: Congress
C: The Attorney General
D: The Consumer Financial Protection Bureau
B: Congress
This organization sets interest rates:
A: Federal Reserve
B: FHA
C: FNMA
D: FHMLC
A: Federal Reserve
Economic stimulus occurs through the use of the:
A: Discount Rate
B: Reserve Requirement
C: Federal Funds Rate
D: All Of The Above
D: All Of The Above
The automated underwriting program for Freddie Mac is called:
A: Desktop Underwriter
B: Loan Prospector
C: Desktop Prospector
D: Loan Underwriter
B: Loan Prospector
The automated underwriting program for Fannie Mae is called:
A: Desktop Underwriter
B: Loan Prospector
C: Desktop Prospector
D: Loan Underwriter
A: Desktop Underwriter
For most conventional loans, typical qualifying ratios are:
A: 10/20
B: 20/30
C: 25/35
D: 28/36
D: 28/36
If a loan meets conventional underwriting guidelines, it will likely be purchased by:
A: Fannie Mae
B: Ginnie Mae
C: Farmer Mac
D: FHA
A: Fannie Mae
Bernice is buying a home. Her lender is requiring her to have PMI. What is it her lender is requiring her to do?
A: Obtain Home Owners Insurance
B: Obtain A Co-Signer
C: Obtain A Home Warranty
D: Obtain Mortgage Insurance
D: Obtain Mortgage Insurance
The Federal Reserve Banks are supervised by:
A: The Board Of Governors
B: Congress
C: The Consumer Financial Protection Bureau
D: The Attorney General
A: The Board Of Governors
In what year did the “Mortgage Meltdown” occur?
A: 2006
B: 2007
C: 2008
D: 2009
C: 2008
The “Mortgage Meltdown” led to the creation of what piece of legislation?
A: The Equal Credit Opportunity Act
B: The Real Estate Settlement And Procedures Act
C: The SAFE Act
D: The Truth In Lending Act
C: The SAFE Act
The acronym “NMLS” stands for:
A: Nationwide Mortgage Licensing System
B: National Mortgage Licensing System
C: Nationwide Mortgage Licensing Service
D: National Mortgage Licensing Service
A: Nationwide Mortgage Licensing System
