Session 15 — MBS & 2008 • True/False Quiz

1) An MBS is a bond backed by a pool of home loans.

2) In a pass-through, investors receive interest and principal (including prepayments).

3) Agency guarantees protect investors from prepayment risk.

4) In non-agency (private-label) MBS, investors bear credit risk rather than a government/GSE guarantor.

5) In a tranche structure, senior bonds take losses before junior/equity bonds.

6) Over-collateralization, subordination, excess spread, and reserve accounts are credit enhancements.

7) The TBA market lets most agency MBS trade on general specs today for delivery later.

8) When mortgage rates drop well below borrowers’ existing rates, prepayments usually slow down.

9) When rates rise, extension risk increases because borrowers prepay less.

10) The worst problems in 2006–07 mainly came from agency MBS rather than private-label subprime/Alt-A.

11) Rating agencies consistently got private-label MBS risk right before 2008.

12) A key accelerant in 2008 was heavy short-term funding of long-term assets; when confidence cracked, lenders pulled lines and forced sales.

13) Post-crisis rules eliminated all risk from MBS investing.

14) Today the market is dominated by agency MBS, with an explicit (Ginnie) or GSE guarantee on credit—investors still manage prepayment/rate risk.

15) In many agency programs, servicers advance scheduled principal & interest on delinquent loans (and later recoup), helping cash-flow continuity to investors.