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

Teaser rates made loans appear affordable at origination but reset to much higher rates after an introductory period, causing payment shock and mass defaults when home values fell.

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

Servicer compensation was tied to collecting payments and foreclosure fees, while pooling and servicing agreements often restricted modifications, creating perverse incentives against helping 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

Robo-signing involved bank employees or contractors signing thousands of foreclosure affidavits per day without reading them, leading to a national foreclosure freeze and major bank settlements.

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

The CRA encouraged banks to lend in all communities they served, but studies found CRA-covered lenders made a small proportion of subprime loans and had lower default rates than non-CRA lenders.

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

HARP, launched in 2009, allowed homeowners with little or no equity in Fannie Mae or Freddie Mac loans to refinance at lower interest rates, reducing monthly payments and default risk.

Mortgage Practice Test

Mortgage Practice Test

Mortgage Subprime Mortgage Crisis 4