So-called subprime mortgages were typically all of the following, except for mortgages granted to borrowers with less-than-perfect credit. Backed by the full faith and credit of the U.S. government. Not held to maturity by the originating lender but instead resold to servicing banks. Aggregated and sliced into tranches representing a different risk class.

So-called subprime mortgages were typically all of the following, except for mortgages granted to borrowers with less-than-perfect credit. Backed by the full faith and credit of the U.S. government. Not held to maturity by the originating lender but instead resold to servicing banks. Aggregated and sliced into tranches representing a different risk class.

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter6: Accounting Quality

Section: Chapter Questions

Problem 4QE

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Which of the following statement is TRUE? Select one: O a. None of the other options is correct. O b. Losses on real estate loans are first compensated by the investors in commercial paper issued by the financial institution. O c. In a syndicated loan, a group of lenders shares the return, but not the default risk of the loan Od. When a bank gives a secured loan, the bank has first claim on specific assets of the borrower in the event of a default. Oe. When the repayment probability of a loan is equal to zero, the financial institution investing in this loan faces low credit risk.
Which of the following situations are likely to result in higher loan defaults? Mortgages are held by originating institutions in their portfolios. Borrowers have higher equity in their homes. Lenders who require documentation of income, liabilities and asset ownership. Borrowers with low credit scores.
1(A).Why did Lenders/Banks start to securitize mortgages (creating Collateralized Mortgages or Debt Obligations (CMOs/CDOs)? (B).What is the conflict of interest that credit agencies faced leading up to the financial crisis? (hint: The Big Short)?
Which statement best describe subprime loans? a.Loan issued to high-risk borrowers with poor credit ratings b.Loans priced below the prime lending rate c.Loans issued to low-risk borrowers with poor credit ratings d.Loan issued to high-risk borrowers with strong credit ratings
Credit risk is a factor for commercial mortgage-backed securities because they are backed by mortgage loans that: А. are non-recourse. В. have limited call protection. C. have no prepayment penalty points.
Why do federally guaranteed loans usually have the least risk for banks, List some popular guaranteed loan programs.
Which of the following statements is false? A. Asset-backed securities (ABS) may be backed by financial assets other than mortgages. B. Residential mortgage-backed securities (RMBS) are backed by mortgages on income producing real estate properties. C. The securitization of financial assets increases the liquidity of the underlying financial assets. D. In a sequential-pay collateralized mortgage obligations (CMOs), all scheduled principal payments and prepayments are paid to each tranche in sequence until that tranche is paid off.
Explain why it's possible for tranching to make invest ing in a mortgage -backed security more risky than investing in a single subprime loan?
S Throughout the process of originating and selling mortgages, mortgage companies face a number of risks. Therefore, it is important for a lending institution to evaluate the risks of mortgage loan default through a process commonly referred to as: Multiple Choice O O O с warehousing. mortgage fallout. loan servicing. loan underwriting.
Commercial loan agreements should contain which of the following: a. representations b. fees and charges c. means of repayment d. all of the above In order for the seller of securitized securities to remove the assets (i.e. mortgages) from the balance sheet, the sale must a. have a service agreement b. be overcollateralized c. be without recourse d. be made at a discount (original issue discount) Banks may deny creditworthy borrowers loan requests if a. they are non-corporate entities b. they are on late on paying taxes c. the loan is too risky d. they are individuals Chattel mortgages refer to a. a security agreement using corporate assets b. a security agreement using commercial equipment c. a security agreement using intangible property d. a security agreement using tangible personal property
Which of the following hindered the development of a secondary market for mortgages in the early 20th century? Check all that apply. Institutional investors could not assess the default risk of every single mortgage. It was impossible to turn illiquid assets such as real estate into liquid financial instruments. Institutional investors avoided dealing with financial instruments backed by the federal government, such as mortgages. Institutional investors were not interested in small non-standardized financial instruments. Which of the following helped foster the development of a market for collateralized debt obligations (CDOs) and collateralized mortgage obligations (CMOs) in the 2000s? Check all that apply. Inflows of foreign capital Establishment of the Government National Mortgage Association (Ginnie Mae) and the Federal Home Loan Mortgage Corp (Freddie Mac) Development of mathematical models to price CDOs and CMOs Establishment of the Federal National Mortgage Association (Fannie…
When a borrower is unable to repay its loan, it is common that the lender would negotiate with the borrower by rescheduling its payment on the loan to the future. How would the rescheduling of sovereign bonds affect the interest rate risk of the bonds?