CMA - Certified Mortgage Advisor Mortgage-Backed Securities Overview Questions and Answers

Question 1

Which of the following best describes the primary purpose of the mortgage securitization process for the mortgage lending industry?

Accepted Answer

To bundle individual mortgages into tradable securities, which increases the pool of capital available for new lending.

Answer

The process of securitization involves pooling mortgage loans and converting them into securities that can be sold to investors. This process provides liquidity to the original lenders, allowing them to sell their loans on the secondary market and use the proceeds to fund new mortgage loans for other borrowers.

Question 2

What is the primary distinction between a Ginnie Mae (GNMA) mortgage-backed security and an MBS issued by Fannie Mae (FNMA) or Freddie Mac (FHLMC)?

Accepted Answer

GNMA does not purchase loans but guarantees securities backed by government loans, which carry the full faith and credit of the U.S. government.

Answer

Ginnie Mae, a government-owned corporation, does not buy or sell loans. Instead, it guarantees the timely payment of principal and interest on MBS backed by federally insured or guaranteed loans (like FHA, VA, and USDA loans). This guarantee is explicitly backed by the full faith and credit of the U.S. government, which is considered a stronger guarantee than that of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.

Question 3

An investor holding a high-coupon agency MBS is concerned because a sharp drop in market interest rates has led to a wave of homeowner refinancing. This investor is primarily exposed to which type of risk?

Accepted Answer

Prepayment Risk

Answer

Prepayment risk is the risk that homeowners will pay off their mortgages faster than expected, typically by refinancing when interest rates fall. For an investor holding a higher-coupon MBS, this is detrimental because their high-yielding investment is returned to them early, forcing them to reinvest the principal at the new, lower rates, thus reducing their overall return.

Question 4

A mortgage advisor sees that yields on newly issued agency mortgage-backed securities are rising. What is the MOST likely immediate effect on the interest rates offered to new mortgage applicants?

Accepted Answer

Mortgage rates will likely increase.

Answer

The interest rates offered to consumers are directly tied to the yields on mortgage-backed securities in the secondary market. If investors demand a higher yield (return) to purchase MBS, the cost of funds for lenders increases. This higher cost is passed on to borrowers in the form of higher mortgage interest rates.

Question 5

Which of the following is a key characteristic of a private-label mortgage-backed security (PLS) when compared to an agency MBS?

Accepted Answer

They typically carry a higher degree of credit risk for the investor.

Answer

Private-label securities (PLS), also known as non-agency MBS, are issued by private entities like investment banks and are not guaranteed by Ginnie Mae, Fannie Mae, or Freddie Mac. Therefore, the investor bears the credit risk—the risk that the homeowner will default on the underlying mortgage payments.

(CMA) Certified Mortgage Advisor Practice Test

(CMA) Certified Mortgage Advisor Practice Test

CMA - Certified Mortgage Advisor Mortgage-Backed Securities Overview Questions and Answers