Mortgage Subprime Mortgage Crisis 4

Question 1

What was the 'teaser rate' strategy used in many subprime adjustable-rate mortgages?

Accepted Answer

An artificially low initial interest rate that reset sharply higher after one to three years

Answer

A discount offered to borrowers who paid two points upfront at closing

Answer

A guaranteed rate cap that prevented interest from exceeding a set ceiling

Answer

A promotional rate available only to borrowers with 20% down payments

Question 2

What was the primary reason mortgage servicers often preferred foreclosure over loan modifications during the crisis?

Accepted Answer

Servicer fee structures and contractual obligations to MBS investors made modifications financially unattractive

Answer

Federal law prohibited servicers from modifying loan terms without court approval

Answer

Foreclosure was cheaper to execute than modifying a loan in all circumstances

Answer

Servicers lacked the legal authority to contact delinquent borrowers

Question 3

What is 'robo-signing' as it came to light after the subprime crisis?

Accepted Answer

Bank employees signing foreclosure documents en masse without reviewing them, often fraudulently

Answer

An automated system that approved mortgage applications without human review

Answer

Software that electronically signed closing documents on behalf of absent borrowers

Answer

A program that automatically generated credit scores without human oversight

Question 4

What was the Community Reinvestment Act (CRA), and how was it incorrectly blamed for the subprime crisis?

Accepted Answer

A 1977 law encouraging lending to low-income areas that critics blamed but studies found accounted for a small fraction of subprime loans

Answer

A law that mandated 20% of all bank loans be made to subprime borrowers

Answer

A federal program that guaranteed repayment of all loans made in underserved communities

Answer

A rule requiring banks to lower credit standards for all applicants equally

Question 5

What was the HARP (Home Affordable Refinance Program) created to address?

Accepted Answer

Helping underwater homeowners with Fannie/Freddie-backed loans refinance at lower rates

Answer

Providing cash grants to first-time homebuyers in foreclosure-heavy neighborhoods

Answer

Allowing banks to write off bad mortgage debt on their balance sheets tax-free

Answer

Creating a federal fund to purchase and demolish vacant foreclosed homes

Question 6

Which investment bank's collapse in March 2008 is often cited as an early warning signal of the subprime crisis's severity?

Accepted Answer

Bear Stearns

Answer

Goldman Sachs

Answer

Morgan Stanley

Answer

Merrill Lynch

Question 7

What is a 'jumbo' mortgage, and how did jumbo loans behave differently in the subprime crisis?

Accepted Answer

Loans exceeding conforming loan limits that couldn't be sold to GSEs and faced tighter credit markets

Answer

Mortgages with unusually large monthly payments regardless of loan size

Answer

Government-backed loans for multifamily properties with more than four units

Answer

Loans made to borrowers with credit scores above 800 at preferential rates