Answer-first summary for fast verification
Answer: The crisis showed that the agency securitization market has little or no impact on mortgage loan origination: agency securitization collapsed in 2008 and subsequently, but mortgage lending was not impacted
**Correct answer: C** This is the **EXCEPT** statement, so we are looking for the one that is **false**. - **A is true**: non-agency issuance grew significantly before the crisis, partly because agencies were limited to conforming mortgages within size and loan-to-value constraints. - **B is true**: non-agency issuance collapsed in 2008 as investors lost confidence in mortgage securities not backed by the U.S. government. - **C is false**: agency securitization **does** have a major effect on mortgage loan origination. When agency securitization collapsed during the crisis, mortgage lending was affected. Therefore, this statement is the exception. - **D is true**: non-agency RMBS investors face default risk, while agency RMBS investors are generally protected from default risk but remain exposed to **prepayment risk**. Therefore, the incorrect statement is **C**.
Author: Manit Arora
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Question-102.3. In regard to residential mortgage-backed securities (RMBS) and the 2007-2009 credit crisis, according to Pietro, each of the following statements is true EXCEPT:
A
The market share of non-agency issuance (i.e., private-label MBS and CMO) increased dramatically from 1996 to 2006, at least in part, because agencies could only securitize conventional mortgages that could not exceed size limits and an 80% loan-to-value (LTV) ratio
B
The market share of non-agency issuance plummeted to less than 5% in 2008 because investors became wary of MBS not backed (explicitly or implicitly) by the full faith of the U.S. government.
C
The crisis showed that the agency securitization market has little or no impact on mortgage loan origination: agency securitization collapsed in 2008 and subsequently, but mortgage lending was not impacted
D
The credit crisis is (was) characterized by an unusually large number of homeowner defaults. Unlike investors in non-agency RMBS are exposed to default risk, investors in agency RMBS are (were) generally protected against default risk, but they nevertheless are (were) exposed to the early receipt of cash flows as agencies stepped in to repay the mortgages; i.e., prepayment risk.
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