Interest Rates & Economic Factors Flashcards
7 cards from real CMA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Interest Rates & Economic Factors flashcards as text
What is the primary reason MBS (Mortgage-Backed Securities) yields affect consumer mortgage rates?
Answer: Lenders sell mortgages into the secondary market, so MBS prices determine their cost of capital
Since most lenders sell originated loans as MBS, the yield investors demand on those securities directly determines the rate lenders must charge to remain profitable.
Which scenario would most likely cause mortgage rates to fall in the near term?
Answer: A weaker-than-expected jobs report raises recession concerns
Weak employment data increases demand for safe-haven Treasury bonds, pushing yields down and pulling mortgage rates lower with them.
What is 'negative amortization' and under what rate condition can it occur?
Answer: When the loan balance grows because the payment is less than the interest due, often with payment-capped ARMs
Negative amortization occurs when a payment cap prevents the payment from covering accrued interest, causing the unpaid interest to be added to the principal balance.
How does quantitative tightening (QT) by the Federal Reserve typically affect mortgage rates?
Answer: QT raises mortgage rates by reducing MBS demand and increasing yields
When the Fed reduces its MBS holdings via QT, it removes a major buyer from the market, pushing MBS prices down and yields (and mortgage rates) up.
A lender quotes a 7.0% note rate with 1.5 discount points. What is the borrower effectively doing by paying points?
Answer: Prepaying interest upfront to buy down the rate below 7.0%
Discount points are prepaid interest that permanently reduce the loan's interest rate, lowering monthly payments in exchange for upfront cash.
Which economic concept explains why lenders charge higher rates on longer-term mortgages compared to shorter-term mortgages?
Answer: Liquidity preference and term premium
Lenders demand a term premium for longer maturities because their capital is tied up longer, exposing them to greater uncertainty about future rates and inflation.
If the Consumer Price Index (CPI) unexpectedly rises 0.8% in a single month, what would most likely happen to 30-year mortgage rates the following day?
Answer: Rates would likely rise as bond markets sell off on inflation fears
Hotter-than-expected inflation triggers an immediate bond market selloff as investors demand higher yields to offset purchasing power erosion, pushing mortgage rates up.