Subprime Mortgage Crisis Quiz: Trivia!

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  • 1/24 Questions

    Lending to people who would not usually be able to qualify for a mortgage traditionally is what type of lending?

    • Prime
    • Qib pro lending
    • Sub-prime
    • Elastic return lending
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About This Quiz


The United States subprime mortgage calamity was an international financial crisis that took place between 2007 and 2010. It contributed to the global economic situation at the time. As it pertains to this quiz, you must know who the US Secretary of Treasury was and what a banker receives when homeowners default on their mortgage payments. This quiz will help you understand the Subprime Mortgage Crisis.

Subprime Mortgage Crisis Quiz: Trivia! - Quiz

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  • 2. 
    Who was the Secretary of the U.S. Treasury when this crisis all went down? - ProProfs

    Who was the Secretary of the U.S. Treasury when this crisis all went down?

    • Barack Obama

    • Henry Paulson

    • Hillary Clinton

    • John Thain

    Correct Answer
    A. Henry Paulson
    Explanation
    Henry Paulson was the Secretary of the U.S. Treasury when this crisis occurred.

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  • 3. 

    Why did it seem that no one was concerned about the riskiness of lending to people who usually would not qualify for a loan?

    • Each person in the chain was handing the risk off to another through different financial instruments such as CDO’s.

    • The banks were told to discontinue lending by the federal government.

    • People signed a piece of paper when they received the mortgage that said they promised to pay back the loan.

    • Builders were building more homes so the bankers were not worried.

    Correct Answer
    A. Each person in the chain was handing the risk off to another through different financial instruments such as CDO’s.
    Explanation
    The reason why it seemed that no one was concerned about the riskiness of lending to people who usually would not qualify for a loan is because each person involved in the lending process was transferring the risk to someone else through various financial instruments like CDO's (Collateralized Debt Obligations). This means that the risk was being passed along the chain, making it appear as if no one was taking responsibility for it.

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  • 4. 

    Which type of Collateralized Debt Obligation (packing the mortgages into a box and slicing it up) receives the lowest return for the investor?

    • Safe

    • Okay

    • Risky

    • None of the above.

    Correct Answer
    A. Safe
    Explanation
    A "safe" collateralized debt obligation (CDO) is one that is backed by low-risk assets, such as high-quality mortgages. These CDOs typically receive the lowest return for the investor because they offer lower yields compared to riskier CDOs. This is because the risk associated with the underlying assets is lower, resulting in lower potential returns for the investor.

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  • 5. 

    The fact that home values had historically always been rising led lenders to add what risky behaviors into their lending practices?

    • No down payment

    • No proof of income

    • Lending to less responsible people

    • All of the above

    Correct Answer
    A. All of the above
    Explanation
    The correct answer is "All of the above". The fact that home values had historically always been rising led lenders to become more lenient in their lending practices. They allowed borrowers to purchase homes with no down payment, which increased the risk of default. They also stopped requiring proof of income, making it easier for people with unstable financial situations to obtain loans. Additionally, lenders started lending to less responsible people, who may not have had a good credit history or a stable source of income. All of these risky behaviors were a result of the belief that home values would continue to rise.

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  • 6. 

    What did the system of packing mortgages into a box and slicing it up into 3 different parts and selling them to investors depend upon to be successful?

    • People who took out loans would be able to pay them back.

    • House prices would continue to increase, as they historically have.

    • Government bailouts and new regulations.

    • Both A & B

    Correct Answer
    A. Both A & B
    Explanation
    The system of packing mortgages into a box and slicing it up into 3 different parts and selling them to investors depended on both A and B to be successful. If people who took out loans were able to pay them back, it ensured that the investors would receive their returns. Additionally, if house prices continued to increase, as they historically have, it would further benefit the investors by increasing the value of the mortgage-backed securities. Therefore, the success of the system relied on both factors.

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  • 7. 

    What would an individual get a mortgage for?

    • Automobile

    • Home

    • Apartment

    • Life insurance

    • Both B & C

    Correct Answer
    A. Home
    Explanation
    An individual would get a mortgage for a home. A mortgage is a loan that is used to purchase a property, typically a house or a condominium. It allows individuals to borrow money from a lender, usually a bank, to finance the purchase of a home. The borrower then repays the loan over a specified period of time, usually with interest. Therefore, getting a mortgage is a common way for individuals to obtain the necessary funds to buy a home.

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  • 8. 

    What does a banker receive when home owners default on their mortgage payments?

    • Bankruptcy

    • A home

    • Nothing

    • Half of the remaining payments due.

    Correct Answer
    A. A home
    Explanation
    When homeowners default on their mortgage payments, the banker receives the home. This means that the ownership of the property is transferred to the bank as a form of collateral for the unpaid mortgage. This allows the bank to recover their losses by selling the home to repay the outstanding debt.

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  • 9. 

    How does leverage work?

    • The person buying the object must agree to purchase for a lower price than what was spent acquiring the item.

    • The more money that an investor borrows will lead to larger returns for the investor.

    • An investor must sell the item overseas for the leverage “tax” to kick in.

    • A person who owns a home would use their leverage to acquire lower interest rates.

    Correct Answer
    A. The more money that an investor borrows will lead to larger returns for the investor.
    Explanation
    Leverage works by allowing investors to borrow money to make investments. By borrowing more money, investors can increase their purchasing power and potentially generate larger returns on their investments. This is because they can use the borrowed funds to acquire more assets or make larger investments, which can lead to higher profits if the investments perform well. However, it is important to note that leverage also amplifies losses, so it carries a higher level of risk.

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  • 10. 

    What happens to the value of people’s homes who are paying their mortgages back on time to the bank even though many of their neighbors have defaulted?

    • Their homes go up in value since they are one of only a few people making their payments on time.

    • Their homes value does not change since they already locked in the purchase price.

    • Their home goes down in value because of all the houses for sale.

    • Their home goes up in value since they keep their yard kept up nicely.

    Correct Answer
    A. Their home goes down in value because of all the houses for sale.
    Explanation
    When many neighbors default on their mortgages and put their houses up for sale, it creates an oversupply of houses in the market. This increased supply leads to a decrease in demand for houses, causing the prices to drop. As a result, even though homeowners who are paying their mortgages on time are being responsible, the value of their homes still goes down due to the overall market conditions.

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  • 11. 

    What financial incentive has led to so many foreclosures?

    • The home is worth less than the amount of the mortgage.

    • The home is worth more than the amount of the mortgage.

    • Lower home mortgage interest rates.

    • Government tax credits for first time home owners.

    Correct Answer
    A. The home is worth less than the amount of the mortgage.
    Explanation
    The financial incentive that has led to so many foreclosures is that the home is worth less than the amount of the mortgage. This means that homeowners owe more on their mortgage than the current value of their home, making it difficult for them to sell the property or refinance their loan. As a result, many homeowners are unable to keep up with their mortgage payments and end up facing foreclosure.

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  • 12. 

    The CEO’s of the major banks were called to Washington during the week following the Lehman Brothers collapse because credits markets froze. What did Treasury Secretary force the banks to do? I.                    Promise to never, ever, let this happen again. II.                  To sell off all of their CDO’s to banks in China. III.                Take TARP money from the federal government. IV.                Make the government part-owner of the banks.

    • Only II.

    • Only I. & IV.

    • Only III. & IV.

    • Only I, II. And III.

    Correct Answer
    A. Only III. & IV.
    Explanation
    During the week following the Lehman Brothers collapse, the CEO's of major banks were called to Washington because credit markets froze. The Treasury Secretary forced the banks to take TARP money from the federal government and make the government part-owner of the banks. This was done in order to stabilize the financial system and prevent further collapse.

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  • 13. 
    Who is Ken Lewis? - ProProfs

    Who is Ken Lewis?

    • Head of the Federal Reserve at the time of the financial meltdown.

    • Leader of a group of investors at Merrill Lynch

    • CEO of Bank of America

    • Leader of Lehman Brothers

    Correct Answer
    A. CEO of Bank of America
    Explanation
    Ken Lewis is the correct answer because he was the CEO of Bank of America. During the financial meltdown, Lewis played a significant role in managing the crisis and making crucial decisions for the bank. He led Bank of America through a challenging period and implemented strategies to stabilize the company amidst the economic turmoil.

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  • 14. 

    Why were adjustable rate mortgages such a damaging tool to the housing bubble?

    • Home prices failed to go up as anticipated.

    • Adjustable rate mortgages reset to higher percentage, raising the amount of people’s monthly house payment.

    • They encouraged people to sell their homes and move into apartments.

    • Both A & B.

    Correct Answer
    A. Both A & B.
    Explanation
    Adjustable rate mortgages were damaging to the housing bubble because home prices did not increase as expected. This meant that when the mortgages reset to higher percentages, people's monthly house payments increased significantly. This put a strain on their finances and made it more difficult for them to afford their homes. Additionally, the uncertainty of rising interest rates led many people to sell their homes and move into apartments, further contributing to the housing bubble. Therefore, both factors A and B played a role in the damaging effects of adjustable rate mortgages.

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  • 15. 

    Why was it so important to announce the big bank merger involving Bank of America by the Monday morning in September, just two days after it was even proposed?

    • To prevent a collapse of the U.S. financial system

    • Because one of the CEO’s was in bad health and may not live very much longer.

    • To offset the news about Lehman Brothers going bankrupt.

    • All of the above.

    • Only A & C

    Correct Answer
    A. Only A & C
    Explanation
    The announcement of the big bank merger involving Bank of America by Monday morning in September was important to prevent a collapse of the U.S. financial system. This is because the merger would help stabilize the banking sector and restore confidence in the financial markets. Additionally, announcing the merger would also offset the negative news about Lehman Brothers going bankrupt, which could have further destabilized the financial system. Therefore, the correct answer is Only A & C.

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  • 16. 

    What is the purpose of a credit default swap?

    • So that a mortgage investment instrument gets a high bond rating and investors see the top CDO slice as a safe investment.

    • To allow the government to have access to funding.

    • For investors to find ways to give less home mortgages to risky families.

    • All of the above.

    Correct Answer
    A. So that a mortgage investment instrument gets a high bond rating and investors see the top CDO slice as a safe investment.
    Explanation
    A credit default swap is a financial instrument that allows investors to transfer the risk of default on a specific bond or loan to another party. By purchasing a credit default swap, a mortgage investment instrument can obtain a high bond rating, which makes it more attractive to investors. This, in turn, makes the top CDO slice appear as a safe investment option for investors. Therefore, the purpose of a credit default swap in this context is to enhance the perceived safety and attractiveness of a mortgage investment instrument.

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  • 17. 

    Why did investors begin to look away from safe, traditional investments like U.S. Treasuries? I.        The Fed lowered rates so low that it wasn’t a decent enough return on their investment II.      The U.S. government bond had been upgraded. III.    The pool of money available had grown faster than safe investments had IV.    The number of investment banks had decreased due to tighter money policies at the Fed

    • Only I.

    • I. & III. only

    • II. & III. only.

    • I., II., & III.

    Correct Answer
    A. I. & III. only
    Explanation
    Investors began to look away from safe, traditional investments like U.S. Treasuries because the Fed lowered rates so low that it wasn't a decent enough return on their investment, and the pool of money available had grown faster than safe investments had.

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  • 18. 

    What fueled the housing bubble? I.        Builders having access to funds from financial institutions to build more homes. II.      Easy money policies from the Federal Reserve. III.    Money flowing into America from fast-growing economies. IV.    Government policies encouraging homeownership.

    • Only I.

    • Only I. & IV.

    • I., II., & III.

    • I., II., III., & IV.

    Correct Answer
    A. I., II., III., & IV.
    Explanation
    The housing bubble was fueled by multiple factors. Builders having access to funds from financial institutions allowed them to build more homes, increasing the supply and contributing to the bubble. Easy money policies from the Federal Reserve made it easier for people to borrow money, leading to increased demand for homes. Money flowing into America from fast-growing economies also contributed to the housing bubble by increasing demand. Additionally, government policies encouraging homeownership, such as tax incentives and relaxed lending standards, further fueled the bubble. Therefore, all of the options provided - I., II., III., & IV. - played a role in fueling the housing bubble.

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  • 19. 

    Which of the following companies had a reputation of being an outsider to Wall Street, more of the Wal-Mart of banking?

    • Bank of America

    • Goldman Sachs

    • Citibank

    • Merrill Lynch

    Correct Answer
    A. Bank of America
    Explanation
    Bank of America had a reputation of being an outsider to Wall Street, more of the Wal-Mart of banking. This suggests that Bank of America was perceived as a company that operated differently from traditional Wall Street banks, similar to how Wal-Mart operates differently from other retailers.

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  • 20. 

    What company would have been the next domino to fall after Lehman Brothers and needed to be rescued during the weekend in September 2008?

    • Bank of America

    • Goldman Sachs

    • Citibank

    • Merrill Lynch

    Correct Answer
    A. Merrill Lynch
    Explanation
    Merrill Lynch would have been the next domino to fall after Lehman Brothers and needed to be rescued during the weekend in September 2008. This is because Merrill Lynch was heavily exposed to the subprime mortgage crisis and faced significant losses. As a result, the company's financial stability was severely compromised, leading to the need for a rescue or bailout.

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  • 21. 

    Which of the following statements is false?

    • Nearly 40% of homes purchased in 2005 and 2006 were not intended to be used as a primary residence by the purchaser.

    • Lenders are 20% less likely to have begun foreclosure proceedings on subprime adjustable rate mortgages than traditional mortgages.

    • Many homeowners took out second mortgages or home equity lines of credit to fund their consumer spending and take advantage of low interest rates.

    • Foreclosures place downward pressure on housing prices.

    Correct Answer
    A. Lenders are 20% less likely to have begun foreclosure proceedings on subprime adjustable rate mortgages than traditional mortgages.
    Explanation
    This statement is false because lenders are actually more likely to have begun foreclosure proceedings on subprime adjustable rate mortgages compared to traditional mortgages.

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  • 22. 

    Where is the power in the U.S. Banking system today?

    • North Carolina, at Bank of America’s headquarters.

    • Wall Street

    • Washington D.C.

    • None of the above

    Correct Answer
    A. Washington D.C.
    Explanation
    Washington D.C. is the correct answer because it is the location of the Federal Reserve, which is the central banking system of the United States. The Federal Reserve has significant power and influence over the U.S. banking system, as it is responsible for setting monetary policy, regulating banks, and maintaining the stability of the financial system. While Wall Street is a major financial center, it does not have the same level of centralized power as Washington D.C. North Carolina, specifically Bank of America's headquarters, may be a significant player in the banking industry, but it does not represent the overall power in the U.S. banking system.

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  • 23. 

    Which of the following was not a cause of the financial crisis?

    • Speculation

    • Government policies

    • Central Bank policies

    • Increasing interest rates

    • Credit rating agencies stamp of approval on mortgage backed securities and collateralized debt obligations

    Correct Answer
    A. Increasing interest rates
    Explanation
    Increasing interest rates can be considered a cause of the financial crisis. When interest rates rise, it becomes more expensive for individuals and businesses to borrow money, which can lead to a decrease in spending and investment. This can have a negative impact on the economy and potentially contribute to a financial crisis. Therefore, the given answer is incorrect.

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  • 24. 

    Which of the following statements is false?

    • In 2005, the median down payment for first-time home buyers was 2%, with 43% of those buyers making no down payment whatsoever.

    • With the advent of securitization, the traditional model has given way to the "originate to distribute" model, in which banks essentially sell the mortgages and distribute credit risk to investors through mortgage-backed securities. This increased focus on processing mortgage transactions rather than ensuring their credit quality.

    • In 1996, HUD set a goal for Fannie Mae and Freddie Mac that at least 42% of the mortgages they purchase be issued to borrowers whose household income was below the median in their area. This target was increased to 50% in 2000 and 52% in 2005.

    • The financial crisis is not the fault of the financial institutions. They acted responsibly and with caution during the past 10 years. The financial crisis was more of a “bad luck” event, than one caused by a multitude of events.

    • Ordinary citizens, government policies, financial institutions taking excessive risks, policies of central banks, credit rating agencies are all partially at fault for the current financial crisis.

    Correct Answer
    A. The financial crisis is not the fault of the financial institutions. They acted responsibly and with caution during the past 10 years. The financial crisis was more of a “bad luck” event, than one caused by a multitude of events.
    Explanation
    The given statement is false because it claims that the financial crisis is not the fault of the financial institutions and that they acted responsibly and with caution. However, it is widely acknowledged that the financial crisis was caused by a multitude of events, including the risky behavior and irresponsible actions of financial institutions. The crisis was not simply a result of bad luck, but rather a consequence of systemic failures and poor decision-making within the financial industry.

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  • Mar 22, 2023
    Quiz Edited by
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  • Jan 07, 2010
    Quiz Created by
    Dangelodb
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