Mortgage Subprime Mortgage Crisis 2 — Questions and Answers
Question 1: Which government-sponsored enterprises (GSEs) were placed into federal conservatorship in September 2008 due to their exposure to subprime mortgages?
- Fannie Mae and Freddie Mac (Correct answer)
- Ginnie Mae and Sallie Mae
- FHA and VA
- FDIC and OCC
Correct answer: Fannie Mae and Freddie Mac
Fannie Mae and Freddie Mac were taken into federal conservatorship by the FHFA in September 2008 after suffering massive losses from mortgage-backed securities.
Question 2: What is a 'liar loan' in the context of the subprime mortgage crisis?
- A mortgage where borrowers self-certify income without documentation verification (Correct answer)
- A loan with a deliberately misleading interest rate disclosure
- A mortgage that resets to a higher rate without notice
- A loan originated by unlicensed brokers
Correct answer: A mortgage where borrowers self-certify income without documentation verification
Liar loans, also called stated-income loans, allowed borrowers to self-report income without lenders verifying the information, leading to widespread fraud.
Question 3: What role did credit default swaps (CDS) play in amplifying the subprime mortgage crisis?
- They allowed investors to bet on or hedge against mortgage defaults, spreading risk widely (Correct answer)
- They guaranteed principal repayment on all mortgage-backed securities
- They set maximum interest rates on subprime loans
- They required lenders to hold minimum capital reserves
Correct answer: They allowed investors to bet on or hedge against mortgage defaults, spreading risk widely
Credit default swaps let institutions like AIG insure mortgage bonds without holding adequate capital reserves, creating massive interconnected exposure when defaults surged.
Question 4: What was the 'originate-to-distribute' model that contributed to the subprime crisis?
- Lenders originate loans intending to sell them, removing incentive to ensure loan quality (Correct answer)
- Banks distribute mortgage applications among multiple underwriters for risk spreading
- A federal program to originate loans and distribute them to low-income borrowers
- A system where loan officers distribute leads to competing mortgage brokers
Correct answer: Lenders originate loans intending to sell them, removing incentive to ensure loan quality
The originate-to-distribute model meant lenders earned fees at closing and immediately sold loans, eliminating any long-term stake in whether borrowers could repay.
Question 5: Which 2010 legislation created the Consumer Financial Protection Bureau (CFPB) largely in response to the subprime mortgage crisis?
- Dodd-Frank Wall Street Reform and Consumer Protection Act (Correct answer)
- Sarbanes-Oxley Act
- Glass-Steagall Restoration Act
- Community Reinvestment Act Amendment
Correct answer: Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Act of 2010 established the CFPB to oversee consumer financial products and protect borrowers from predatory lending practices exposed during the crisis.
Question 6: What was a 'silent second' mortgage in the context of predatory subprime lending?
- An undisclosed second lien used to cover a down payment, hidden from the primary lender (Correct answer)
- A second mortgage that had no interest for the first five years
- A government-backed subordinate loan for first-time homebuyers
- A reverse mortgage taken out without the knowledge of heirs
Correct answer: An undisclosed second lien used to cover a down payment, hidden from the primary lender
Silent seconds were hidden second mortgages that funded down payments without the first lender's knowledge, creating undisclosed debt and misrepresenting borrower equity.
Question 7: What happened to U.S. home prices between the peak in 2006 and the trough around 2012?
- They fell approximately 30% nationally, with some markets declining over 50% (Correct answer)
- They fell approximately 10% nationally before recovering
- They remained flat nationally but declined in sunbelt states only
- They fell approximately 60% nationally across all markets
Correct answer: They fell approximately 30% nationally, with some markets declining over 50%
The S&P/Case-Shiller national home price index fell roughly 27–30% from peak to trough, with hard-hit markets like Las Vegas and Phoenix losing over 50% of their value.
Mortgage Subprime Mortgage Crisis 2
Which government-sponsored enterprises (GSEs) were placed into federal conservatorship in September 2008 due to their exposure to subprime mortgages?