Financial and Housing Markets Flashcards
7 cards from real CMPS practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Financial and Housing Markets flashcards as text
What is 'duration' as it applies to mortgage-backed securities?
Answer: A measure of a security's price sensitivity to changes in interest rates
Duration measures how much a bond or MBS price will change for a given change in interest rates; higher duration means greater price sensitivity.
When mortgage rates decline, what typically happens to existing fixed-rate mortgage borrowers and MBS investors respectively?
Answer: Borrowers benefit; investors face prepayment risk as refinancing accelerates
Falling rates create a refinancing opportunity for borrowers, which is a benefit to them but a risk for MBS investors who lose their higher-yield income stream.
Which of the following best describes 'negative amortization' in a mortgage product?
Answer: A loan where the minimum payment is less than accruing interest, causing the balance to grow
Negative amortization occurs when a borrower's payment doesn't cover all accrued interest, so the unpaid interest is added to the principal balance, causing it to increase.
What does the 'months of supply' metric in housing markets indicate when it reads 3 months?
Answer: At the current sales pace, all listed homes would sell within 3 months
Months of supply divides current inventory by the monthly sales rate; 3 months means the market is quite tight (seller's market), as 6 months is considered balanced.
What is the primary reason mortgage lenders sell loans on the secondary market shortly after origination?
Answer: To replenish capital so they can originate additional loans
Selling loans to secondary market investors returns capital to the lender, enabling them to fund new mortgage originations without being constrained by their balance sheet.
How does a high home price-to-income ratio in a given metro area typically affect mortgage lending activity?
Answer: It reduces affordability, tightening the pool of qualified borrowers and often dampening loan volume
When home prices greatly exceed local incomes, fewer households can qualify for mortgages at standard debt-to-income thresholds, reducing the overall addressable market for lenders.
What market condition describes a period when both home prices and mortgage rates are rising simultaneously?
Answer: A double-compression environment that severely reduces affordability and can stall transaction volume
When both home prices and interest rates rise together, affordability is compressed from two directions — higher price AND higher monthly payment — which can sharply reduce buyer activity.