CMA Mortgage-Backed Securities Overview 2

Question 1

Which federal agency guarantees timely payment of principal and interest on mortgage-backed securities?

Accepted Answer

Ginnie Mae

Answer

Ginnie Mae (GNMA) is the only MBS guarantor backed by the full faith and credit of the U.S. government.

Question 2

What is the primary risk that MBS investors face when interest rates decline significantly?

Accepted Answer

Prepayment risk

Answer

When rates fall, homeowners refinance, causing early principal return to MBS investors who must reinvest at lower yields — this is prepayment risk.

Question 3

In a pass-through MBS, how are principal and interest payments distributed to investors?

Accepted Answer

Pro-rata based on ownership percentage

Answer

In a pass-through structure, all investors receive their proportional share of principal and interest payments after servicer fees.

Question 4

What term describes the difference between the coupon rate on an MBS and the underlying mortgage rates?

Accepted Answer

Servicing spread

Answer

The servicing spread (or servicing fee) is the portion of mortgage interest retained by the servicer before passing the remainder to MBS investors.

Question 5

Which measure represents the weighted average of the remaining terms to maturity of mortgages in an MBS pool?

Accepted Answer

Weighted Average Maturity (WAM)

Answer

WAM is the weighted average of remaining loan terms in the pool, indicating how long the pool's mortgages have left to run.

(CMA) Certified Mortgage Advisor Practice Test