CMA Interest Rates & Economic Factors 3 — Questions and Answers
Question 1: How does a decrease in the money supply typically affect mortgage interest rates?
- Rates decrease because money is cheaper to borrow
- Rates increase because lenders have less capital to deploy (Correct answer)
- Rates remain unchanged as the Fed targets stability
- Rates decrease due to lower demand for loans
Correct answer: Rates increase because lenders have less capital to deploy
A contracting money supply reduces available credit, forcing lenders to raise rates to ration the limited funds among competing borrowers.
Question 2: What does a rising Mortgage Bankers Association (MBA) refinance index typically indicate?
- Home prices are falling rapidly
- Interest rates have recently declined, spurring refinance activity (Correct answer)
- Lenders are tightening credit standards
- Purchase loan demand is increasing
Correct answer: Interest rates have recently declined, spurring refinance activity
The MBA refinance index surges when current mortgage rates drop below existing borrowers' rates, making refinancing financially attractive.
Question 3: In a rising rate environment, which mortgage product carries the LEAST interest rate risk for the borrower?
- Interest-only ARM
- 5/1 hybrid ARM
- 30-year fixed-rate mortgage (Correct answer)
- HELOC with variable rate
Correct answer: 30-year fixed-rate mortgage
A 30-year fixed-rate mortgage locks in the rate for the entire loan term, completely insulating the borrower from future rate increases.
Question 4: The Federal Open Market Committee (FOMC) meets approximately how many times per year to set monetary policy?
- 4
- 6
- 8 (Correct answer)
- 12
Correct answer: 8
The FOMC meets eight times per year (roughly every six weeks) to review economic conditions and set the federal funds rate target.
Question 5: Which of the following would most likely cause the Fed to LOWER interest rates?
- Unemployment falling to 3.0% with GDP at 4%
- Rising core PCE inflation above the 2% target
- A recession with rising unemployment and slowing GDP (Correct answer)
- A housing price bubble in major metro areas
Correct answer: A recession with rising unemployment and slowing GDP
The Fed cuts rates to stimulate economic activity when growth slows and unemployment rises, as lower rates encourage borrowing and investment.
Question 6: A borrower's ARM is tied to the SOFR index. What is SOFR?
- Standard Overnight Fixed Rate, a Treasury benchmark
- Secured Overnight Financing Rate, based on Treasury repo transactions (Correct answer)
- Standard Official Federal Reserve rate
- Secure Origination Financing Reference, a bank-published rate
Correct answer: Secured Overnight Financing Rate, based on Treasury repo transactions
SOFR (Secured Overnight Financing Rate) is based on actual overnight repurchase agreement transactions secured by US Treasury securities, replacing LIBOR.
Question 7: How does strong job growth typically influence mortgage rates?
- It lowers rates by increasing consumer confidence
- It raises rates by increasing inflation and Fed tightening expectations (Correct answer)
- It has no effect because employment is a lagging indicator
- It lowers rates by reducing default risk for lenders
Correct answer: It raises rates by increasing inflation and Fed tightening expectations
Strong employment signals potential wage inflation and faster economic growth, prompting the Fed to tighten monetary policy, which pushes mortgage rates higher.
CMA Interest Rates & Economic Factors 3
How does a decrease in the money supply typically affect mortgage interest rates?