Multiple Choice Questions

[QUESTION]
1. Total mortgage debt outstanding as of the third quarter of 2011 approached $13.6 trillion.
Which of the following types of mortgage loans accounts for the greatest percentage of
mortgage debt outstanding?
A. Residential (1-4 family)
B. Apartment (multifamily)
C. Commercial
D. Farm
Ans: A
Difficulty: Basic
Learning Objective: 2
[QUESTION]
2. To put into perspective the amount of residential mortgage debt outstanding, it is useful to
compare this market to other prominent sources of available debt. Listing the issuer with the
largest amount of debt outstanding first, which of the following choices best depicts the
relative rank ordering amongst the major sources of outstanding debt in the U.S. as of the end
of 2011?
A. Residential mortgage debt, marketable U.S. government bonds, corporate bonds, consumer
debt
B. Marketable U.S. government bonds, residential mortgage debt, corporate bonds, consumer
debt
C. Corporate bonds, marketable U.S. government bonds, residential mortgage debt, consumer
debt
D. Consumer debt, residential mortgage debt, marketable U.S. government bonds, corporate
bonds
Ans: B
Difficulty: Intermediate
Learning Objective: 2
[QUESTION]
3. In the early 1970s, home mortgage lenders were predominantly depository institutions. By
the end of the decade, the growth of deposits at these institutions became negative due to the
emergence of more attractive investment opportunities such as money market funds. This
change in the distribution chain of funds is more commonly referred to as:
A. Deregulation
B. Disintermediation
C. Warehousing
D. Underwriting
Ans: B
Difficulty: Basic
Learning Objective: 2

[QUESTION]
4. In 1989, Congress took major steps to establish depository institution accountability by
requiring these institutions to hold more capital as they take on riskier assets. Which of the
following Congressional acts imposed these capital standards on depository institutions?
A. Depository Institutions Deregulation and Monetary Control Act
B. Financial Institutions Reform, Recovery, and Enforcement Act
C. Secure and Fair Enforcement for Mortgage Licensing Act
D. Riegle Community Development and Regulatory Improvement Act
Ans: B
Difficulty: Basic
Learning Objective: 1
[QUESTION]
5. In addition to providing home mortgages, large commercial banks have specialized in
providing short-term funds to mortgage banking companies in order to enable them to
originate mortgage loans and hold the loans until the mortgage banking company can sell
them in the secondary market. This type of financing is commonly referred to as:
A. Mortgage pipeline
B. Loan servicing
C. Warehousing
D. Loan underwriting
Ans: C
Difficulty: Basic
Learning Objective: 1
[QUESTION]
6. The emergence of mortgage securities propelled the development of mortgage companies,
an entity significantly different from the thrifts and banks that previously dominated the
mortgage landscape. Which of the following parties is responsible for providing mortgage
origination services and initial funding within this new framework?
A. Mortgage banker
B. Mortgage broker
C. Portfolio lender
D. Security analyst
Ans: A
Difficulty: Basic
Learning Objective: 2
[QUESTION]
7. Mortgage banks typically will attempt to sell loans as quickly as possible after they are
originated by either issuing mortgage securities or selling the loan to an intermediary that will
subsequently sell the loan in the secondary market. The period between loan commitment and

loan sale is referred to as the:

A. mortgage pipeline
B. mortgage note
C. mortgage fallout
D. mortgage term
Ans: A
Difficulty: Basic
Learning Objective: 3
[QUESTION]
8. 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:
A. mortgage fallout
B. loan servicing
C. warehousing
D. loan underwriting
Ans: D
Difficulty: Basic
Learning Objective: 3
[QUESTION]
9. When a mortgage is used as collateral for the issuance of a mortgage-backed security
(MBS), the underlying mortgage is said to be securitized. As of the end of 2010,
approximately what percentage of residential mortgage loans in the U.S. was being sold into
the secondary market and being used as collateral for the issuance of MBS?
A. 25%
B. 40%
C. 85%
D. 100%
Ans: C
Difficulty: Intermediate
Learning Objective: 1
[QUESTION]
10. In the late 1960s, Congress created a number of agencies designed to address a struggling
secondary market for residential mortgages. Which of the following organizations was
developed primarily to guarantee mortgage-backed securities based on pools of FHA, VA and
Rural Housing Service loans, rather than issue, buy or sell mortgages?
A. Federal National Mortgage Association (Fannie Mae)
B. Government National Mortgage Association (Ginnie Mae)
C. Federal Home Loan Mortgage Corporation (Freddie Mac)
D. Federal Agricultural Mortgage Corporation (Farmer Mac)
Ans: B

Difficulty: Basic
Learning Objective: 4
[QUESTION]
11. In the securitization process, mortgages are pooled together and cash flows are packaged
into securities to be sold in the secondary market. Agencies and private companies that pool
mortgages and sell mortgage-backed securities (MBS) are often referred to as:
A. thrifts
B. credit unions
C. conduits
D. automated underwriters
Ans: C
Difficulty: Basic
Learning Objective: 4
[QUESTION]
12. The Federal National Mortgage Association (Fannie Mae) was originally established to
provide a secondary market for FHA-insured and VA-guaranteed loans. All of the following
statements regarding Fannie Mae are true EXCEPT:
A. Fannie Mae lends money directly to homebuyers
B. Fannie Mae was once a private, self-supporting company with publicly traded stock that
has now been placed into conservatorship by the United States government following the
mortgage crisis of 2007-2008.
C. Fannie Mae fully guarantees timely payment of interest and principal to investors.
D. Fannie Mae is authorized to buy both conventional home loans and government-sponsored
residential mortgages.
Ans: A
Difficulty: Intermediate
Learning Objective: 4
[QUESTION]
13. In the modern framework of home mortgage lending, there are four channels by which
first mortgage home loans are created. Within which of the following channels would you
typically find a Wall Street investment bank obtaining loans, pooling loans, and creating a
senior-subordinate security structure?
A. Traditional direct (portfolio) lending
B. FHA/VA loan securitization
C. Conforming conventional loan securitization
D. Nonconforming Conventional loan securitization
Ans: D
Difficulty: Intermediate
Learning Objective: 2

[QUESTION]
14. Traditional home mortgage underwriting is said to rest on three elements, the three
Cs. The housing expense ratio is one tool that lenders will use to address concerns
associated with which of the three Cs?
A. Collateral
B. Creditworthiness
C. Capacity
D. Capability
Ans: C
Difficulty: Intermediate
Learning Objective: 5
[QUESTION]
15. Recently, mortgage banking has become the natural method for doing mortgage lending.
Within the mortgage lending process, which of the following roles serves as the primary
revenue source for mortgage banks?
A. Loan commitment
B. Loan funding
C. Loan servicing
D. Loan sales
Ans: C
Difficulty: Basic
Learning Objective: 3
[QUESTION]
16. Despite the risks that are inherent in the mortgage lending process, mortgage bankers have
various tools at their disposal to hedge risk exposure. For example, since mortgage bankers
know that only part of the loan commitments that they issue will be taken down by borrowers,
they can purchase the right to sell a certain dollar amount of a certain loan type in the
secondary market through what is commonly referred to as a:
A. Standby forward commitment
B. Mortgage pipeline
C. Conduit
D. Collateral
Ans: A
Difficulty: Basic
Learning Objective: 3
[QUESTION]
17. Suppose that a mortgage bank locked in an interest rate for a prospective borrower at
8.5%. However, prior to the loan closing, the market mortgage rate falls to 7.5 %. In this
scenario, the mortgage banker would be most concerned with which of the following risks?
A. Interest rate risk.

B. Pipeline fallout risk.

C. Default risk.
D. Liquidity risk.
Ans: B
Difficulty: Advanced
Learning Objective: 3
[QUESTION]
18. The development of Fannie Mae and Freddie Mac established the framework for a liquid
secondary market for residential mortgages. In 2010, the share of all residential mortgage
loans owned or securitized by Fannie Mae and Freddie Mac approached approximately:
A. 5%
B. 16%
C. 44%
D. 76%
Ans: C
Difficulty: Advanced
Learning Objective: 4
[QUESTION]
19. Despite many innovations in the lending process that made mortgage loans more
accessible and affordable to the general public, many potential borrowers faced considerable
barriers in qualifying for a loan and making a down payment. Which of the following types of
loans was designed for a borrower with weak credit, those who seek 100 percent financing, or
who cannot document their income?
A. Conventional prime home loan
B. Affordable housing loan
C. Subprime mortgage loan
D. Bridge loan
Ans: C
Difficulty: Basic
Learning Objective: 7
[QUESTION]
20. Traditional home mortgage underwriting is said to rest on three elements, the three
Cs. Recent research (e.g., Archer and Smith, 2011) has confirmed that the
underwriting characteristic most strongly associated with default is:
A. Collateral
B. Creditworthiness
C. Capacity
D. Capability
Ans: A
Difficulty: Intermediate

Learning Objective: 5
[QUESTION]
21. In analyzing a borrowers credit worthiness, the lender will typically examine the
borrowers FICO score (a product developed by the Fair Isaac Corporation). High quality
(prime) borrowers are those with a credit score above:
A. 350
B. 620
C. 660
D. 850
Ans: C
Difficulty: Intermediate
Learning Objective: 5
[QUESTION]
22. The traditional approach to loan underwriting has virtually been replaced by an automated
underwriting process that involves a statistically derived equation to determine the level of
default risk associated with a loan application. All of the following statements regarding the
automated underwriting process are true EXCEPT:
A. The marginal cost per loan underwritten using the automated process is greater than the
case of traditional underwriting.
B. The time taken to approve a loan using the automated process is considerably shorter than
the case of traditional underwriting
C. The success in identifying risky loans is higher using the automated process than is the
case with traditional underwriting
D. Automated underwriting has made home ownership available to households for whom it
previously was inaccessible.
Ans: A
Difficulty: Intermediate
Learning Objective: 5
Multiple Choice Problems
[QUESTION]
23. Loan servicing includes a number of responsibilities such as collecting monthly mortgage
payments from the borrower, remitting principal and interest payments to investors, ensuring
sufficient escrow payments are being made by the borrower, and managing default if it should
arise. In exchange for these services, mortgage bankers receive a fee. If the outstanding loan
balance is $250,000 and the annual servicing fee is 0.35%, what is the monthly fee for
servicing the loan?
A. $72.92
B. $729.17
C. $875.00

D. $8,750.00
Ans: A
Difficulty: Basic
Learning Objective: 3
[QUESTION]
24. In ascertaining whether a borrower has the ability to pay off his loan over time, a
mortgage bank may rely on calculating a total debt ratio as part of its underwriting process.
Utilizing the following information, calculate the total debt ratio. Monthly principal and
interest on mortgage loan: $635, Monthly Tax and insurance payments into escrow: $125,
Monthly Car lease payment (lease term is 3 years): $350, Gross monthly income: $2,500
A. 25.4%
B. 30.4%
C. 44.4%
D. 53.2%
Ans: C
Difficulty: Basic
Learning Objective: 5
[QUESTION]
25. Suppose an institution has purchased a $250,000 mortgage loan from the loan originator
and wishes to create a mortgage pass-through security. In doing so, this institution will
generate revenue by charging a servicing fee of 35 basis points. If the monthly mortgage
payment on the loan is $1,250, how much income is passed through to the investor in the
mortgage pass through each month (rounded to the nearest dollar)?
A. $73
B. $375
C. $875
D. $1177
Ans: D
Difficulty: Advanced
Learning Objective: 3

[QUESTION]
26. Utilizing the following information, calculate the housing expense ratio. Monthly
Principal and interest on mortgage loan: $635; Monthly Tax and insurance payments into
escrow: $125; Gross monthly income: $2,500
A. 25.4%
B. 30.4%
C. 44.4%
D. 53.2%
Ans: B
Difficulty: Basic
Learning Objective: 5