Mortgage Subprime Mortgage Crisis 2

Question 1

Which government-sponsored enterprises (GSEs) were placed into federal conservatorship in September 2008 due to their exposure to subprime mortgages?

Accepted Answer

Fannie Mae and Freddie Mac

Answer

Fannie Mae and Freddie Mac were taken into federal conservatorship by the FHFA in September 2008 after suffering massive losses from mortgage-backed securities.

Question 2

What is a 'liar loan' in the context of the subprime mortgage crisis?

Accepted Answer

A mortgage where borrowers self-certify income without documentation verification

Answer

Liar loans, also called stated-income loans, allowed borrowers to self-report income without lenders verifying the information, leading to widespread fraud.

Question 3

What role did credit default swaps (CDS) play in amplifying the subprime mortgage crisis?

Accepted Answer

They allowed investors to bet on or hedge against mortgage defaults, spreading risk widely

Answer

Credit default swaps let institutions like AIG insure mortgage bonds without holding adequate capital reserves, creating massive interconnected exposure when defaults surged.

Question 4

What was the 'originate-to-distribute' model that contributed to the subprime crisis?

Accepted Answer

Lenders originate loans intending to sell them, removing incentive to ensure loan quality

Answer

The originate-to-distribute model meant lenders earned fees at closing and immediately sold loans, eliminating any long-term stake in whether borrowers could repay.

Question 5

Which 2010 legislation created the Consumer Financial Protection Bureau (CFPB) largely in response to the subprime mortgage crisis?

Accepted Answer

Dodd-Frank Wall Street Reform and Consumer Protection Act

Answer

The Dodd-Frank Act of 2010 established the CFPB to oversee consumer financial products and protect borrowers from predatory lending practices exposed during the crisis.

Mortgage Practice Test

Mortgage Practice Test

Mortgage Subprime Mortgage Crisis 2