Subprime Mortgage Crisis Flashcards
7 cards from real Mortgage practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Subprime Mortgage Crisis flashcards as text
What was the 'teaser rate' strategy used in many subprime adjustable-rate mortgages?
Answer: An artificially low initial interest rate that reset sharply higher after one to three years
Teaser rates made loans appear affordable at origination but reset to much higher rates after an introductory period, causing payment shock and mass defaults when home values fell.
What was the primary reason mortgage servicers often preferred foreclosure over loan modifications during the crisis?
Answer: Servicer fee structures and contractual obligations to MBS investors made modifications financially unattractive
Servicer compensation was tied to collecting payments and foreclosure fees, while pooling and servicing agreements often restricted modifications, creating perverse incentives against helping borrowers.
What is 'robo-signing' as it came to light after the subprime crisis?
Answer: Bank employees signing foreclosure documents en masse without reviewing them, often fraudulently
Robo-signing involved bank employees or contractors signing thousands of foreclosure affidavits per day without reading them, leading to a national foreclosure freeze and major bank settlements.
What was the Community Reinvestment Act (CRA), and how was it incorrectly blamed for the subprime crisis?
Answer: A 1977 law encouraging lending to low-income areas that critics blamed but studies found accounted for a small fraction of subprime loans
The CRA encouraged banks to lend in all communities they served, but studies found CRA-covered lenders made a small proportion of subprime loans and had lower default rates than non-CRA lenders.
What was the HARP (Home Affordable Refinance Program) created to address?
Answer: Helping underwater homeowners with Fannie/Freddie-backed loans refinance at lower rates
HARP, launched in 2009, allowed homeowners with little or no equity in Fannie Mae or Freddie Mac loans to refinance at lower interest rates, reducing monthly payments and default risk.
Which investment bank's collapse in March 2008 is often cited as an early warning signal of the subprime crisis's severity?
Answer: Bear Stearns
Bear Stearns collapsed in March 2008 and was acquired by JPMorgan Chase with Fed assistance, signaling how deeply subprime losses had penetrated major financial institutions.
What is a 'jumbo' mortgage, and how did jumbo loans behave differently in the subprime crisis?
Answer: Loans exceeding conforming loan limits that couldn't be sold to GSEs and faced tighter credit markets
Jumbo loans exceeded GSE conforming limits and relied on private securitization markets, which froze during the crisis, making jumbo financing scarce and expensive even for creditworthy borrowers.