Mortgage Subprime Mortgage Crisis 3

Question 1

What is 'negative amortization' and how did it contribute to the subprime mortgage crisis?

Accepted Answer

Loan balances grow when payments don't cover accruing interest, leaving borrowers deeper in debt

Answer

A penalty charged when borrowers pay off their mortgage early

Answer

The process of reducing loan principal faster than scheduled

Answer

Interest charged retroactively when a borrower misses a payment

Question 2

What was the Emergency Economic Stabilization Act of 2008 primarily designed to do?

Accepted Answer

Authorize the Treasury to purchase toxic mortgage assets through the TARP program

Answer

Provide direct cash payments to homeowners facing foreclosure

Answer

Nationalize major U.S. banks affected by mortgage losses

Answer

Suspend foreclosure proceedings for two years

Question 3

How did collateralized debt obligation (CDO) squared products increase systemic risk during the subprime crisis?

Accepted Answer

They repackaged existing CDO tranches into new securities, obscuring underlying mortgage risk

Answer

They divided individual mortgages into smaller pieces sold to multiple investors

Answer

They guaranteed CDO returns using Treasury bonds as collateral

Answer

They allowed banks to issue mortgages directly to pension funds

Question 4

What does the term 'underwater mortgage' mean, as commonly used during the subprime crisis?

Accepted Answer

The outstanding loan balance exceeds the current market value of the home

Answer

A mortgage with a floating rate that has risen above the borrower's payment capacity

Answer

A loan made on a property in a flood zone without required insurance

Answer

A delinquent loan that has been transferred to a government agency

Question 5

Which rating agency practice most directly contributed to inflated ratings on subprime mortgage-backed securities?

Accepted Answer

The issuer-pays model, where securities issuers paid rating agencies for ratings

Answer

Government mandates requiring AAA ratings for all federally backed mortgages

Answer

A shortage of qualified analysts leading to cursory reviews

Answer

International accounting standards that overstated collateral values

Question 6

What is 'predatory lending' in the mortgage context, as highlighted by the subprime crisis?

Accepted Answer

Imposing unfair or abusive loan terms on borrowers, often targeting vulnerable populations

Answer

Offering below-market rates to attract borrowers away from competitors

Answer

Charging the maximum legally allowed interest rate on all subprime loans

Answer

Lending only to borrowers with pristine credit to minimize default risk

Question 7

What effect did the subprime mortgage crisis have on the broader U.S. economy, as classified by the NBER?

Accepted Answer

It triggered the Great Recession, which officially lasted from December 2007 to June 2009

Answer

It caused a mild slowdown that lasted only two quarters before recovery

Answer

It led to a depression that lasted from 2007 to 2015

Answer

It only affected the financial sector with no measurable GDP impact