Chapter 2 — Quiz

Twenty-four questions. Answer key in the collapsed block at the bottom.

1. A typical American home mortgage in the 1920s had a term of approximately:

A. 30 years B. 20 years C. 3 to 5 years D. 15 years

2. In a balloon mortgage, the borrower's expectation at maturity was generally to:

A. Pay the full principal from savings B. Refinance into a new short-term loan C. Convert to a fixed 30-year loan D. Surrender the property

3. The Home Owners' Loan Corporation was created in:

A. 1929 B. 1933 C. 1938 D. 1944

4. The FHA, created in 1934, primarily:

A. Lends money to homebuyers B. Insures lenders against loss on qualifying loans C. Purchases loans from lenders D. Regulates appraisers

5. Which was created first?

A. Freddie Mac B. Ginnie Mae C. Fannie Mae D. The VA home loan guaranty

6. In the HOLC's residential security maps, a grade of D was represented by which color?

A. Green B. Blue C. Yellow D. Red

7. The VA home loan guaranty was established by:

A. The National Housing Act of 1934 B. The Servicemen's Readjustment Act of 1944 C. The Emergency Home Finance Act of 1970 D. The Housing and Economic Recovery Act of 2008

8. In 1968, Fannie Mae was divided. The entity remaining within the federal government was:

A. Freddie Mac B. Ginnie Mae C. The FHFA D. The FHLB

9. Freddie Mac was created in:

A. 1938 B. 1968 C. 1970 D. 1989

10. Ginnie Mae guarantees securities backed by:

A. Conventional conforming loans B. Jumbo loans C. Government-insured and guaranteed loans (FHA, VA, USDA) D. Non-QM loans

11. The savings and loan crisis of the 1980s was primarily caused by:

A. Widespread borrower default B. Interest-rate risk from borrowing short and lending long C. Appraisal fraud alone D. The collapse of the secondary market

12. FIRREA (1989) is directly relevant to modern origination because it:

A. Created the CFPB B. Established federal appraiser licensing and standards C. Created Fannie Mae D. Enacted the Ability-to-Repay rule

13. "Stated income" documentation is effectively prohibited today by:

A. The LO Compensation rule B. TRID C. The Ability-to-Repay rule D. HMDA

14. A 2/28 hybrid ARM must be qualified at:

A. The teaser rate B. The fully indexed rate C. The rate at year 28 D. The APR

15. Negative amortization is:

A. Required in a Qualified Mortgage B. Prohibited in a Qualified Mortgage C. Permitted only on FHA loans D. Permitted with a 20% down payment

16. The Loan Originator Compensation rule was written primarily in response to:

A. Appraisal pressure B. Stated income lending C. Compensation that varied with loan terms, creating steering incentives D. Balloon mortgages

17. Fannie Mae and Freddie Mac were placed into conservatorship on:

A. March 16, 2008 B. July 30, 2008 C. September 6, 2008 D. September 15, 2008

18. The S.A.F.E. Act, which requires licensing or registration of mortgage loan originators, was enacted as part of:

A. Dodd-Frank (2010) B. HERA (2008) C. FIRREA (1989) D. RESPA (1974)

19. The Consumer Financial Protection Bureau was created by:

A. HERA (2008) B. Dodd-Frank (2010) C. TILA (1968) D. The National Housing Act (1934)

20. TRID — the integrated disclosures — took effect in:

A. January 2014 B. October 2015 C. July 2010 D. March 2021

Short answer

21. Explain, in two sentences, how a savings and loan holding entirely performing loans could lose millions of dollars a year.

22. State the hidden assumption behind each of: (a) the 1920s balloon mortgage; (b) the 1970s thrift business model; (c) 2000s subprime underwriting.

23. Chapter 2 argues that securitization changed what limits the supply of American mortgage money. What was the limit before, and what is it now?

24. Name three practices from the 2000s and, for each, the modern rule that prevents it.

Answer key **1.** C — 3 to 5 years. **2.** B — renewal was the expectation; nobody planned to produce the principal. **3.** B — 1933. **4.** B — the FHA insures. It does not lend. This verb is tested constantly. **5.** C — Fannie Mae (1938). VA guaranty 1944, Ginnie Mae 1968, Freddie Mac 1970. **6.** D — red. Hence "redlining." **7.** B — the Servicemen's Readjustment Act of 1944, the GI Bill. **8.** B — Ginnie Mae, within HUD. Fannie Mae became a shareholder-owned GSE. **9.** C — 1970. **10.** C — government-insured and guaranteed loans. Ginnie Mae does **not** guarantee conventional securities; that is the GSEs. A frequent exam trap. **11.** B — interest-rate risk. Credit losses were a secondary and later problem. **12.** B — federal appraiser licensing and standards. FIRREA also created the RTC and abolished the FSLIC and FHLBB. **13.** C — the Ability-to-Repay rule requires verification of income and assets. **14.** B — the fully indexed rate. Qualifying at the teaser rate is exactly the failure ATR addresses. **15.** B — prohibited in a QM, along with interest-only and terms exceeding 30 years. **16.** C. **17.** C — September 6, 2008. (A is the Bear Stearns sale; B is roughly HERA's enactment; D is the Lehman bankruptcy filing.) **18.** B — HERA, the Housing and Economic Recovery Act of 2008. Candidates routinely attribute the S.A.F.E. Act to Dodd-Frank; it predates it by two years. **19.** B — Dodd-Frank. **20.** B — October 2015. (A is the ATR/QM effective date; D is roughly the URLA transition.) **21.** Its assets were long-term fixed-rate mortgages made years earlier at low rates, while its liabilities were short-term deposits that had to be repriced upward to keep depositors from leaving. When the cost of the deposits exceeded the yield on the mortgage book, the institution lost money every year regardless of whether a single borrower defaulted, and the book took decades to run off. **22.** (a) Refinancing will always be available at maturity. (b) Short-term rates will remain below long-term rates. (c) House prices will keep rising, so a borrower who cannot pay can always sell or refinance. **23.** Before: the amount of savings available locally — the deposits of the institution making the loan, and later of its regional system. Now: the global bond market's appetite for mortgage-backed securities at a given yield and risk. This is why rates track bond markets rather than local deposit levels. **24.** Any three of: stated income → ATR; no-doc → ATR; teaser-rate qualifying → ATR's fully indexed rate requirement; negative amortization → QM prohibition; yield spread premium steering → LO Compensation rule; appraisal pressure → appraiser independence and AMC ordering; prepayment penalties on subprime → QM restrictions; opaque closing costs → TRID.