Mortgage Subprime Mortgage Crisis Question and Answers 2 — Questions and Answers
Question 1: What role did credit default swaps (CDS) play in the subprime mortgage crisis?
- They allowed investors to bet against mortgage-backed securities, amplifying losses across the financial system (Correct answer)
- They provided affordable insurance to homeowners against foreclosure
- They reduced the risk of subprime lending by distributing it evenly
- They were used exclusively by government agencies to stabilize markets
Correct answer: They allowed investors to bet against mortgage-backed securities, amplifying losses across the financial system
Credit default swaps allowed investors to speculate on mortgage defaults, which magnified systemic risk when subprime borrowers began defaulting en masse.
Question 2: Which government-sponsored enterprise was placed into conservatorship in September 2008 due to losses from mortgage-backed securities?
- Federal Home Loan Banks
- Ginnie Mae
- Fannie Mae (Correct answer)
- Sallie Mae
Correct answer: Fannie Mae
Fannie Mae and Freddie Mac were both placed into conservatorship by the Federal Housing Finance Agency in September 2008 due to massive losses on mortgage-backed securities.
Question 3: What was a typical characteristic of a NINJA loan issued before the subprime crisis?
- It required a minimum credit score of 700
- It was issued to borrowers with no income, no job, and no assets (Correct answer)
- It offered fixed interest rates below the prime rate
- It was backed by full government guarantees
Correct answer: It was issued to borrowers with no income, no job, and no assets
NINJA loans were issued to borrowers with no verified income, no job, and no assets, representing some of the riskiest lending practices before the crisis.
Question 4: How did the Community Reinvestment Act (CRA) relate to the subprime mortgage crisis according to most economic research?
- It was the primary cause of the crisis by forcing banks to make risky loans
- Most studies found it played a minimal role since the majority of subprime loans were made by non-CRA-regulated lenders (Correct answer)
- It prevented the crisis from becoming worse by requiring prudent lending
- It only applied to investment banks that created mortgage-backed securities
Correct answer: Most studies found it played a minimal role since the majority of subprime loans were made by non-CRA-regulated lenders
Most economic research concluded that the CRA played a minimal role because the majority of subprime loans were originated by mortgage companies and other lenders not subject to CRA oversight.
Question 5: What was the approximate peak-to-trough decline in U.S. home prices during the subprime mortgage crisis as measured by the Case-Shiller Index?
- About 10%
- About 20%
- About 33% (Correct answer)
- About 50%
Correct answer: About 33%
The S&P/Case-Shiller U.S. National Home Price Index fell approximately 33% from its peak in 2006 to its trough in early 2012.
Question 6: What practice involved mortgage originators immediately selling loans to investment banks for securitization, reducing their incentive to ensure borrower creditworthiness?
- Loan warehousing
- Originate-to-distribute model (Correct answer)
- Portfolio lending
- Correspondent banking
Correct answer: Originate-to-distribute model
The originate-to-distribute model allowed mortgage originators to quickly sell loans for securitization, which removed their incentive to carefully evaluate borrower risk.
Mortgage Subprime Mortgage Crisis Question and Answers 2
What role did credit default swaps (CDS) play in the subprime mortgage crisis?