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

To eliminate default risk for lenders by transferring it entirely to government-sponsored enterprises (GSEs).

Answer

To allow mortgage servicers to set the interest rates on the underlying loans in a mortgage-backed security (MBS).

Answer

To provide a government guarantee on every mortgage loan originated in the primary market.

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

GNMA securities are composed of conventional loans, while FNMA/FHLMC securities are composed of government-insured loans.

Answer

GNMA securities are only available to institutional investors, whereas FNMA/FHLMC securities are available to individual investors.

Answer

GNMA directly originates the FHA and VA loans that back its securities, unlike 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

Extension Risk

Answer

Credit Risk

Answer

Liquidity Risk

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

Mortgage rates will likely remain unchanged as they are tied to the 10-Year Treasury note.

Answer

Mortgage rates will likely decrease to attract more borrowers into the market.

Answer

The availability of adjustable-rate mortgages will increase while fixed rates remain stable.

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

They are composed exclusively of government-insured loans, such as FHA and VA.

Answer

They are guaranteed by a Government-Sponsored Enterprise (GSE) like Fannie Mae.

Answer

They are only backed by conforming loans that meet strict underwriting guidelines.

Question 6

What defines a 'pass-through' security in the context of mortgage-backed securities?

Accepted Answer

A security where monthly principal and interest payments from the underlying mortgage pool are distributed directly to investors.

Answer

A security where payments are passed from a senior tranche to a subordinate tranche.

Answer

A security that passes all default risk from the issuer directly to the U.S. Treasury.

Answer

A security that only pays investors interest, with the full principal amount returned at maturity.