CMPS Financial and Housing Markets 3

Question 1

What happens to the price of an existing mortgage-backed security when market interest rates rise?

Accepted Answer

Its price falls because its fixed yield becomes less attractive

Answer

Like all fixed-income securities, MBS prices move inversely to interest rates — rising rates make existing fixed-payment MBS less attractive, pushing prices down.

Question 2

What is 'prepayment risk' in the context of mortgage-backed securities?

Accepted Answer

The risk that borrowers will pay off loans early, reducing expected interest income

Answer

Prepayment risk is the uncertainty that borrowers will refinance or pay off their mortgages early, cutting off the interest income that MBS investors expected.

Question 3

Which of the following best describes a 'buyer's market' in residential real estate?

Accepted Answer

High inventory relative to buyer demand, giving buyers negotiating power

Answer

A buyer's market occurs when supply of homes exceeds demand, allowing buyers to negotiate lower prices, request concessions, and take more time to decide.

Question 4

The 'absorption rate' in a housing market refers to:

Accepted Answer

The rate at which available homes are sold over a given period

Answer

Absorption rate measures how quickly existing inventory is sold, typically expressed as months of supply; lower rates indicate stronger demand relative to supply.

Question 5

What is the role of the Government National Mortgage Association (Ginnie Mae) compared to Fannie Mae?

Accepted Answer

Ginnie Mae guarantees MBS backed by government-insured loans (FHA/VA); Fannie Mae deals with conventional loans

Answer

Ginnie Mae is a true government agency that guarantees timely payment on MBS backed by FHA, VA, and USDA loans, while Fannie Mae works with conventional conforming loans.

(CMPS) Certified Mortgage Planning Specialist Practice Test

(CMPS) Certified Mortgage Planning Specialist Practice Test

CMPS Financial and Housing Markets 3