1. Which of the following statements is most likely correct?
Statement 1: Securitization is beneficial for banks because it allows banks to maintain ownership of their securitized assets.
Statement 2: Securitization is beneficial for banks because it increases the funds available for banks to lend.
A. Statement 1.
B. Statement 2.
C. Neither of them.
2. Frank Smith obtains a recourse mortgage loan for $300,000. One year later, when the outstanding balance of the mortgage is $290,000, Frank cannot make his mortgage payments and defaults on the loan. The lender forecloses the loan and sells the house for $250,000.
What amount is the lender entitled to claim from Frank?
3. Which of the following is an important consideration of non-agency residential mortgage-backed security (RMBS) as compared to an agency RMBS?
A. Credit risk.
B. Extension risk.
C. Contraction risk.
1. B. Securitization allows banks to remove assets from their balance sheet, therefore increasing the pool of available capital that can be loaned out.
2. B. In a recourse loan, the lender is entitled to claim the shortfall between the mortgage balance outstanding and the proceeds received from the sale of the property. i.e. 290,000 – 250,000 = 40,000.
3. A. Credit risk is an important consideration of non-agency residential mortgage-backed security (RMBS) as compared to an agency RMBS.