REE 4204 Exam ACTUAL QUESTIONS
AND CORRECT ANSWERS
What is mortgage refinancing - CORRECT ANSWER replace existing mortgage with new
mortgage without property transaction
When do borrowers refinance - CORRECT ANSWER when market rates are low
What does the refinancing decision compare - CORRECT ANSWER pv of benefits to pv of
costs
What is the secondary mortgage market - CORRECT ANSWER market where existing
mortgages are bought and sold
What is collateral for mortgage related securities - CORRECT ANSWER mortgages
How do agencies/firms that purchase mortgages in secondary market raise funds - CORRECT
ANSWER issuing bonds or other debt and pledging mortgage as collateral
What 3 problems were there regarding mortgages in the 1960s - CORRECT ANSWER difficult
for thrifts to sell mortgages because not all the same, buyers concerned with default risk inability to
buy and sell led to supply and demand mismatch
What problem did SMM develop to solve - CORRECT ANSWER mismatch problem
What were two types of mismatches - CORRECT ANSWER regional and institutional
What are 3 characteristics of MBS - CORRECT ANSWER some form of credit enhancement,
avoid double taxation, tailor cash flow of MBS to appeal to investors
What is credit enhancement - CORRECT ANSWER implies less default risk than underlying
mortgages serving as collateral
, How is double taxation avoided - CORRECT ANSWER interest rev passed from MBS to
investor, rev to issuers and cash flow to investor are not taxed
What are the 4 types of MBS - CORRECT ANSWER mortgage pass throughs, mortgage
backed bonds, mortgage pay throughs, collateralized mortgage obligations
Describe investors role in mortgage pass through securities - CORRECT ANSWER undivided
interest in pool or mortgages and has position in mortgages
What is passed through to investor on pro rata basis with regards to mortgage pass throughs -
CORRECT ANSWER principal, interest, prepayment
How do mortgage originators sell mortgage pass throughs with regard to mortgage pass throughs -
CORRECT ANSWER slightly lower yield than interest rate of underlying mortgage and
difference is shared by originator and agency
What are the 3 characteristics of mortgage pass throughs - CORRECT ANSWER investor has
undivided interest in pool and position in mortgage; principal, interest, repayment are passed to
investor on pro rata basis; originators sell payments with slightly lower yield than interest rate from
underlying mortgage and difference is shared between originator and agency
Describe the payments of mortgages backed bonds - CORRECT ANSWER semiannual
payments of interest until maturity and face value due at maturity
How do mortgage backed bonds maturity/yield compare to underlying mortgages - CORRECT
ANSWER both lower
What does trustee of mortgage backed bond do - CORRECT ANSWER marks to market and
changes in value and ensures that agreed on overcollateralization is maintained
Describe the characteristics of mortgage backed bonds - CORRECT ANSWER semiannual
payments of interest and face value due at maturity; maturity and yield less than underlying mortgage;
placed with trustee who marks to market and changes value and ensures overcollateralization is
agreed on; rated
AND CORRECT ANSWERS
What is mortgage refinancing - CORRECT ANSWER replace existing mortgage with new
mortgage without property transaction
When do borrowers refinance - CORRECT ANSWER when market rates are low
What does the refinancing decision compare - CORRECT ANSWER pv of benefits to pv of
costs
What is the secondary mortgage market - CORRECT ANSWER market where existing
mortgages are bought and sold
What is collateral for mortgage related securities - CORRECT ANSWER mortgages
How do agencies/firms that purchase mortgages in secondary market raise funds - CORRECT
ANSWER issuing bonds or other debt and pledging mortgage as collateral
What 3 problems were there regarding mortgages in the 1960s - CORRECT ANSWER difficult
for thrifts to sell mortgages because not all the same, buyers concerned with default risk inability to
buy and sell led to supply and demand mismatch
What problem did SMM develop to solve - CORRECT ANSWER mismatch problem
What were two types of mismatches - CORRECT ANSWER regional and institutional
What are 3 characteristics of MBS - CORRECT ANSWER some form of credit enhancement,
avoid double taxation, tailor cash flow of MBS to appeal to investors
What is credit enhancement - CORRECT ANSWER implies less default risk than underlying
mortgages serving as collateral
, How is double taxation avoided - CORRECT ANSWER interest rev passed from MBS to
investor, rev to issuers and cash flow to investor are not taxed
What are the 4 types of MBS - CORRECT ANSWER mortgage pass throughs, mortgage
backed bonds, mortgage pay throughs, collateralized mortgage obligations
Describe investors role in mortgage pass through securities - CORRECT ANSWER undivided
interest in pool or mortgages and has position in mortgages
What is passed through to investor on pro rata basis with regards to mortgage pass throughs -
CORRECT ANSWER principal, interest, prepayment
How do mortgage originators sell mortgage pass throughs with regard to mortgage pass throughs -
CORRECT ANSWER slightly lower yield than interest rate of underlying mortgage and
difference is shared by originator and agency
What are the 3 characteristics of mortgage pass throughs - CORRECT ANSWER investor has
undivided interest in pool and position in mortgage; principal, interest, repayment are passed to
investor on pro rata basis; originators sell payments with slightly lower yield than interest rate from
underlying mortgage and difference is shared between originator and agency
Describe the payments of mortgages backed bonds - CORRECT ANSWER semiannual
payments of interest until maturity and face value due at maturity
How do mortgage backed bonds maturity/yield compare to underlying mortgages - CORRECT
ANSWER both lower
What does trustee of mortgage backed bond do - CORRECT ANSWER marks to market and
changes in value and ensures that agreed on overcollateralization is maintained
Describe the characteristics of mortgage backed bonds - CORRECT ANSWER semiannual
payments of interest and face value due at maturity; maturity and yield less than underlying mortgage;
placed with trustee who marks to market and changes value and ensures overcollateralization is
agreed on; rated
