Subprime Mortgage Crisis Quiz: Trivia!

24 Questions | By Dangelodb | Updated: Mar 22, 2022 | Attempts: 1881

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Subprime Mortgage Crisis Quiz: Trivia! - 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.

Questions and Answers

1.

What would an individual get a mortgage for?
- A.
  
  Automobile
- B.
  
  Home
- C.
  
  Apartment
- D.
  
  Life insurance
- E.
  
  Both B & C
2.

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
- A.
  
  Only I.
- B.
  
  I. & III. only
- C.
  
  II. & III. only.
- D.
  
  I., II., & III.
3.

Who is Ken Lewis?
- A.
  
  Head of the Federal Reserve at the time of the financial meltdown.
- B.
  
  Leader of a group of investors at Merrill Lynch
- C.
  
  CEO of Bank of America
- D.
  
  Leader of Lehman Brothers
4.

How does leverage work?
- A.
  
  The person buying the object must agree to purchase for a lower price than what was spent acquiring the item.
- B.
  
  The more money that an investor borrows will lead to larger returns for the investor.
- C.
  
  An investor must sell the item overseas for the leverage “tax” to kick in.
- D.
  
  A person who owns a home would use their leverage to acquire lower interest rates.
5.

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?
- A.
  
  People who took out loans would be able to pay them back.
- B.
  
  House prices would continue to increase, as they historically have.
- C.
  
  Government bailouts and new regulations.
- D.
  
  Both A & B
6.

Which type of Collateralized Debt Obligation (packing the mortgages into a box and slicing it up) receives the lowest return for the investor?
- A.
  
  Safe
- B.
  
  Okay
- C.
  
  Risky
- D.
  
  None of the above.
7.

What is the purpose of a credit default swap?
- A.
  
  So that a mortgage investment instrument gets a high bond rating and investors see the top CDO slice as a safe investment.
- B.
  
  To allow the government to have access to funding.
- C.
  
  For investors to find ways to give less home mortgages to risky families.
- D.
  
  All of the above.
8.

Who was the Secretary of the U.S. Treasury when this crisis all went down?
- A.
  
  Barack Obama
- B.
  
  Henry Paulson
- C.
  
  Hillary Clinton
- D.
  
  John Thain
9.

What company would have been the next domino to fall after Lehman Brothers and needed to be rescued during the weekend in September 2008?
- A.
  
  Bank of America
- B.
  
  Goldman Sachs
- C.
  
  Citibank
- D.
  
  Merrill Lynch
10.

Which of the following companies had a reputation of being an outsider to Wall Street, more of the Wal-Mart of banking?
- A.
  
  Bank of America
- B.
  
  Goldman Sachs
- C.
  
  Citibank
- D.
  
  Merrill Lynch
11.

The fact that home values had historically always been rising led lenders to add what risky behaviors into their lending practices?
- A.
  
  No down payment
- B.
  
  No proof of income
- C.
  
  Lending to less responsible people
- D.
  
  All of the above
12.

Lending to people who would not usually be able to qualify for a mortgage traditionally is what type of lending?
- A.
  
  Prime
- B.
  
  Qib pro lending
- C.
  
  Sub-prime
- D.
  
  Elastic return lending
13.

Why did it seem that no one was concerned about the riskiness of lending to people who usually would not qualify for a loan?
- A.
  
  Each person in the chain was handing the risk off to another through different financial instruments such as CDO’s.
- B.
  
  The banks were told to discontinue lending by the federal government.
- C.
  
  People signed a piece of paper when they received the mortgage that said they promised to pay back the loan.
- D.
  
  Builders were building more homes so the bankers were not worried.
14.

What does a banker receive when home owners default on their mortgage payments?
- A.
  
  Bankruptcy
- B.
  
  A home
- C.
  
  Nothing
- D.
  
  Half of the remaining payments due.
15.

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?
- A.
  
  Their homes go up in value since they are one of only a few people making their payments on time.
- B.
  
  Their homes value does not change since they already locked in the purchase price.
- C.
  
  Their home goes down in value because of all the houses for sale.
- D.
  
  Their home goes up in value since they keep their yard kept up nicely.
16.

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.
- A.
  
  Only I.
- B.
  
  Only I. & IV.
- C.
  
  I., II., & III.
- D.
  
  I., II., III., & IV.
17.

Why were adjustable rate mortgages such a damaging tool to the housing bubble?
- A.
  
  Home prices failed to go up as anticipated.
- B.
  
  Adjustable rate mortgages reset to higher percentage, raising the amount of people’s monthly house payment.
- C.
  
  They encouraged people to sell their homes and move into apartments.
- D.
  
  Both A & B.
18.

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.
- A.
  
  Only II.
- B.
  
  Only I. & IV.
- C.
  
  Only III. & IV.
- D.
  
  Only I, II. And III.
19.

Where is the power in the U.S. Banking system today?
- A.
  
  North Carolina, at Bank of America’s headquarters.
- B.
  
  Wall Street
- C.
  
  Washington D.C.
- D.
  
  None of the above
20.

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?
- A.
  
  To prevent a collapse of the U.S. financial system
- B.
  
  Because one of the CEO’s was in bad health and may not live very much longer.
- C.
  
  To offset the news about Lehman Brothers going bankrupt.
- D.
  
  All of the above.
- E.
  
  Only A & C
21.

What financial incentive has led to so many foreclosures?
- A.
  
  The home is worth less than the amount of the mortgage.
- B.
  
  The home is worth more than the amount of the mortgage.
- C.
  
  Lower home mortgage interest rates.
- D.
  
  Government tax credits for first time home owners.
22.

Which of the following was not a cause of the financial crisis?
- A.
  
  Speculation
- B.
  
  Government policies
- C.
  
  Central Bank policies
- D.
  
  Increasing interest rates
- E.
  
  Credit rating agencies stamp of approval on mortgage backed securities and collateralized debt obligations
23.

Which of the following statements is false?
- A.
  
  Nearly 40% of homes purchased in 2005 and 2006 were not intended to be used as a primary residence by the purchaser.
- B.
  
  Lenders are 20% less likely to have begun foreclosure proceedings on subprime adjustable rate mortgages than traditional mortgages.
- C.
  
  Many homeowners took out second mortgages or home equity lines of credit to fund their consumer spending and take advantage of low interest rates.
- D.
  
  Foreclosures place downward pressure on housing prices.
24.

Which of the following statements is false?
- A.
  
  In 2005, the median down payment for first-time home buyers was 2%, with 43% of those buyers making no down payment whatsoever.
- B.
  
  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.
- C.
  
  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.
- D.
  
  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.
- E.
  
  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.