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Financial Markets and Institutions, 7e (Saunders)
Chapter 7 Mortgage Markets
1) The largest category of mortgages by dollar volume is commercial mortgages.
Answer: FALSE
Difficulty: 1 Easy
Topic: Mortgage Markets and Mortgage-Backed Securities: Chapter Overview; Primary
Mortgage Market
Bloom's: Understand
AACSB: Reflective Thinking
Learning Goal: 07-01 Distinguish between a mortgage and a mortgage-backed security.; 07-02
Describe the main types of mortgages issued by financial institutions.
Accessibility: Keyboard Navigation
2) The process of mortgage securitization results in a separation between mortgage origination

and mortgage financing.
Answer: TRUE
Difficulty: 1 Easy
Topic: Secondary Mortgage Market
Bloom's: Remember
Learning Goal: 07-06 Define a mortgage sale.
3) A subprime mortgage is a mortgage made to a borrower who has a below normal credit rating.
Answer: TRUE
Difficulty: 1 Easy
Topic: Primary Mortgage Market
Bloom's: Remember
Learning Goal: 07-05 Describe some of the new innovations in mortgage financing.
4) Federally insured mortgages are called conventional mortgages.
Answer: FALSE
Difficulty: 1 Easy
Bloom's: Remember
Learning Goal: 07-03 Identify the major characteristics of a mortgage.
1
Copyright ©2019 McGraw-Hill
5) Private mortgage insurance (and hence, that part of the homeowner's monthly payment) is
automatically removed from a mortgage when the loan-to-value ratio on the mortgage falls
below 80 percent.
Answer: FALSE
Difficulty: 2 Medium
Bloom's: Understand
6) A borrower using a conventional mortgage will have to put up at least a 20 percent down
payment or purchase private mortgage insurance.
Answer: TRUE
Difficulty: 1 Easy
Bloom's: Understand
7) Discount points are paid to reduce the down payment required.
Answer: FALSE
Difficulty: 1 Easy
Bloom's: Remember
8) On a fixed-rate mortgage the dollars of interest the homeowner pays falls each year the
mortgage is outstanding.
Answer: TRUE
Bloom's: Remember
2
9) A large portion of the mortgage payment goes towards the principal, during the early life of a
mortgage loan.
Answer: FALSE
Topic: Mortgage amortization
Bloom's: Remember
Learning Goal: 07-04 Examine how a mortgage amortization schedule is determined.
10) Subprime mortgage borrowers usually have poorer credit ratings or lower income levels
compared to conventional mortgage borrowers.
Answer: TRUE
Difficulty: 1 Easy
Topic: Other types of mortgages
Bloom's: Remember
11) Pass through mortgage securities are for primary market investors.
Answer: FALSE
Topic: Pass-through securities
Bloom's: Remember
Learning Goal: 07-07 Define a pass-through security.
12) GNMA role is to provide insurance to pass through mortgage securities.
Answer: TRUE
Topic: Pass-through securities
Bloom's: Remember
3
13) Risk attributes of collateralized mortgage obligations differ based on tranches.
Answer: TRUE
Topic: Collateralized mortgage obligation
Bloom's: Remember
Learning Goal: 07-08 Define a collateralized mortgage obligation.
14) In synthetic securitization, the transfer of risk on a pool of assets is achieved by the use of
credit derivatives or guarantees to a third party.
Answer: TRUE
Difficulty: 1 Easy
Topic: International trends in securitization
Bloom's: Remember
Learning Goal: 07-10 Describe the trends in the international securitization of mortgages.
15) For CMOs, prepayment risk is the risk that a borrower may prepay the mortgage before
maturity when interest rates decrease.
Answer: TRUE
Bloom's: Remember
4
16) Rank the following types of mortgages by amount outstanding from largest to smallest.
I. Home mortgages
II. Multifamily mortgages
III. Farm mortgages
IV. Commercial mortgages
A) I, II, III, IV
B) I, II, IV, III
C) II, I, IV, III
D) IV, II, III, I
E) I, IV, II, III
Answer: E
Topic: Mortgage Markets and Mortgage-Backed Securities: Chapter Overview; Primary
Mortgage Market
Bloom's: Understand
Learning Goal: 07-01 Distinguish between a mortgage and a mortgage-backed security.; 07-02
Describe the main types of mortgages issued by financial institutions.
17) The process of packaging and/or selling mortgages that are then used to back publicly traded
debt securities is called
A) collateralization.
B) securitization.
C) market capitalization.
D) stock diversification.
E) mortgage globalization.
Answer: B
Difficulty: 1 Easy
Bloom's: Remember
Learning Goal: 07-06 Define a mortgage sale.
5
18) A ________ placed against mortgaged property ensures that the property cannot be sold
(except by the lender) until the mortgage is paid off.
A) collateral
B) lien
C) writ of habeas corpus
D) down payment
E) writ of certiorari
Answer: B
Bloom's: Remember
19) If a borrower makes a 20 percent down payment on a conventional mortgage, she will be
required to obtain
A) FHA insurance.
B) VA insurance.
C) private mortgage insurance.
D) GNMA payment guarantees
E) None of these choices are correct.
Answer: E
Difficulty: 1 Easy
Bloom's: Understand
6
20) Mortgage payments are ________ on a 15-year fixed-rate mortgage than on a 30-year fixed-
rate mortgage, and ________ is paid on a 15-year mortgage than on a 30-year mortgage; ceteris
paribus.
A) lower; less interest
B) lower; less principal
C) higher; less interest
D) higher; more principal
E) higher; more interest
Answer: C
Bloom's: Understand
Learning Goal: 07-03 Identify the major characteristics of a mortgage.; 07-04 Examine how a
mortgage amortization schedule is determined.
21) With a fixed-rate mortgage, the ________ bears the interest rate risk and with an ARM the
________ bears the interest rate risk.
A) borrower; lender
B) borrower; borrower
C) lender; lender
D) lender; borrower
E) federal government; pool organizer
Answer: D
Bloom's: Understand
7
22) The schedule showing how monthly mortgage payments are split into principal and interest
is called a(n)
A) securitization schedule.
B) balloon payment schedule.
C) graduated payment schedule.
D) amortization schedule.
E) growing equity schedule.
Answer: D
Difficulty: 1 Easy
Bloom's: Remember
23) You purchase a $255,000 house and you pay 20 percent down. You obtain a fixed-rate
mortgage where the annual interest rate is 5.85 percent and there are 360 monthly payments.
What is the monthly payment?
A) $1,215.27
B) $1,203.48
C) $1,194.45
D) $1,367.22
E) $1,504.35
Answer: B
Explanation: 0.80 × $255,000 = Pmt × PVIFA (0.0585/12, 360 months); Pmt = 1,203.48
Calculator Solution:
Amount borrowed is 0.8 × $255,000 = 204,000
PV = 204,000
N = 360
FV = 0
I = 5.85/12 = 0.4875
Solve for PMT to get $1,203.48.
Bloom's: Analyze; Apply
AACSB: Analytical Thinking
8
24) You obtain a $265,000, 15-year fixed-rate mortgage. The annual interest rate is 6.25 percent.
In addition to the principal and interest paid, you must pay $275 a month into an escrow account
for insurance and taxes. What is the total monthly payment (to the nearest dollar)?
A) $2,272
B) $1,632
C) $2,547
D) $1,907
E) $2,311
Answer: C
Explanation: 265,000 = [Pmt × PVIFA (0.0625/12, 180 months)] + 275 = 2,547
PV = 265,000
N = 180
FV = 0
I = 6.25/12 = 0.52083
Solve for PMT to get $2,272.17; the total monthly payment will be 2,272.17 + 275 = $2,547.17.
9
25) You purchase a $325,000 town home and you pay 25 percent down. You obtain a 30-year
fixed-rate mortgage with an annual interest rate of 5.75 percent. After five years you refinance
the mortgage for 25 years at a 5.1 percent annual interest rate. After you refinance, what is the
new monthly payment (to the nearest dollar)?
A) $1,422
B) $1,401
C) $1,366
D) $1,335
E) $1,296
Answer: D
Explanation: 0.75 × $325,000 = Pmt × PVIFA (0.0575/12, 360 months); Balance after five
years = $226,107.8; New Pmt = 226,107.8/PVIFA (0.051/12,300) = $1,335.01
PV = 243,750
N = 360
FV = 0
I = 5.75/12 = 0.47917
Solve for PMT to get $1,422.45; in the amortization schedule of the financial calculator, use P1
= 1 and P2 = 60 to find the balance at the end of the 5th year, which is $226,107.83
The refinanced mortgage will be:

PV = 226,107.83
N = 300
FV = 0
I = 5.1/12 = 0.425
Difficulty: 3 Hard
10
26) A borrower took out a 30-year fixed-rate mortgage of $2,250,000 at a 7.2 percent annual
rate. After five years, he wishes to pay off the remaining balance. Interest rates have by then
fallen to 7 percent. How much must he pay to retire the mortgage (to the nearest dollar)?
A) $2,122,426
B) $2,225,330
C) $2,015,678
D) $2,212,041
E) $1,999,998
Answer: A
Explanation: $2,250,000 = Pmt × PVIFA (0.072/12, 360 months); Pmt = $15,272.73; New
Balance = $15,272.73 × PVIFA (0.072/12, 300 months) = $2,122,425.62
PV = 2,250,000
N = 360
FV = 0
I = 7.2/12 = 0.6
= 1 and P2 = 60 to find the balance at the end of the 5th year, which is $2,122,425.62.
11
27) A home buyer bought a house for $245,000. The buyer paid 20 percent down but decided to
finance closing costs of 3 percent of the mortgage amount. If the borrower took out a 30-year
fixed-rate mortgage at a 5 percent annual interest rate, how much interest will the borrower pay
over the life of the mortgage?
A) $224,655
B) $180,622
C) $228,477
D) $188,265
E) $248,575
Answer: D
Explanation: 0.80 × 245,000 × 1.03 = Pmt × PVIFA (0.05/12, 360 months); Pmt = $1,083.74;
Total interest = (360 × 1,083.74) – (0.80 × 245,000 × 1.03) = $188,265
Amount borrowed is 0.8 × $245,000 = 196,000
Points to be financed 0.03 × 196,000 = 5,880
PV = 201,880
N = 360
FV = 0
I = 5/12 = 0.4167
= 1 and P2 = 360 to find the total interest paid for this loan, which is $188,264.78.
Difficulty: 3 Hard
Learning Goal: 07-03 Identify the major characteristics of a mortgage.; 07-04 Examine how a
mortgage amortization schedule is determined.
12
28) A homeowner could take out a 15-year mortgage at a 5.5 percent annual rate on a $195,000
mortgage amount, or she could finance the purchase with a 30-year mortgage at a 6.1 percent
annual rate. How much total interest over the entire mortgage period could she save by financing
her home with the 15-year mortgage (to the nearest dollar)?
A) $230,408
B) $190,105
C) $155,612
D) $144,325
E) $138,612
Answer: E
Explanation: 195,000 = Pmt × PVIFA (0.055/12, 180 months); Pmt of 1,593.31 × 180 =
91,796; 195,000 = Pmt × PVIFA (0.061/12, 360 months); Pmt of 1,181.69 × 360 = 230,408;
230,408 − 91,796 = 138,612
First find the total interest on the 30-year mortgage:
PV = 195,000
N = 360
FV = 0
I = 6.1/12 = 0.5083
Next find the total interest on the 15-year mortgage:

PV = 195,000
N = 180
FV = 0
I = 5.5/12 = 0.4583
The amount of interest saved is: $230,408.34 − $91,796.29 = $138,612.05.

Difficulty: 3 Hard
13
29) A homeowner can obtain a $250,000, 30-year fixed-rate mortgage at a rate of 6.0 percent
with zero points or at a rate of 5.5 percent with 2.25 points.
If you will keep the mortgage for 30 years, what is the net present value of paying the points (to
the nearest dollar)?
A) $9,475
B) $8,360
C) $7,564
D) $7,222
E) $6,578
Answer: B
Explanation: No Points: Pmt = $250,000/PVIFA (0.06/12, 360 months); Pmt = 1,498.88; Pay
Points: Pmt = $250,000/PVIFA (0.055/12, 360 months); Pmt = 1,419.47; Pmt savings = 1,498.88
− 1,419.47 = 79.40; NPV of points: [79.40 × PVIFA (0.055/12, 360 months)] − (0.0225 ×
250,000) = 8,360
The amount of points to be paid is 0.0225 × 250,000 = 5,625.
First find the difference in the payments for mortgage without points and with points:
Without points
PV = 250,000
N = 360
FV = 0
I = 6.0/12 = 0.5
With points
PV = 250,000
N = 360
FV = 0
I = 5.5/12 = 0.45833
The difference is savings of $79.41 over 30 years with monthly payments. Find the Present value
of this annuity stream:
PMT = 79.41
N = 360
FV = 0
I = 5.5/12 = 0.45833
Solve for PV = 13,985.83.
Finally, the difference between this savings and the points paid is 13,985.83 − 5,625 = $8,360.83.
Difficulty: 3 Hard
14
How long must the owner stay in the house to make it worthwhile to pay the points if the
payment saving is invested monthly?
A) 7.15 years
B) 3.33 years
C) 6.04 years
D) 5.90 years
E) More than 30 years
Answer: A
Explanation: $5,625 points cost = $79.40 payment savings × PVIFA (0.055/12, N); N = 85.85
months/12 = 7.15 years
PV = − 5,625
PMT = 79.41
I = 5.5/12 = 0.45833
FV = 0
Solving for N you get 85.84 months which is 7.15 years.
How long must the owner stay in the house to make it worthwhile to pay the points if the
payment saving is not invested?
A) 7.15 years
B) 3.33 years
C) 6.04 years
D) 5.90 years
E) More than 30 years
Answer: D
Explanation: $5,625 points cost/79.40 payment savings = N = 70.84 months/12 = 5.90 years
15
32) The least used form of mortgage securitization is the ________.
A) second mortgage
B) mortgage-backed bond
C) mortgage pass-through
D) CMO
E) home equity loan
Answer: B
Bloom's: Remember
Learning Goal: 07-07 Define a pass-through security.; 07-08 Define a collateralized mortgage
obligation.
33) You want to buy a $250,000 house and you will use a conventional mortgage. What is the
minimum down payment you have to make to avoid having to purchase mortgage insurance?
A) $10,000
B) $20,000
C) $30,000
D) $40,000
E) $50,000
Answer: E
Explanation: 20% of 250,000 is $50,000
Difficulty: 1 Easy
34) The FHA charges the homeowner ________ to insure an FHA mortgage.
A) nothing
B) 0.5 percent of the loan amount
C) $500
D) 1 percent of the loan amount
E) $1,500
Answer: B
Bloom's: Remember
16
35) A(n) ________ is used to help retired people receive monthly income in exchange for the
equity in their home.
A) SAM
B) Equity Participation Mortgage
C) RAM
D) PLAM
E) GEM
Answer: C
Bloom's: Remember
36) Which of the following statements about mortgage markets is/are true?
I. Mortgage companies service more mortgages than they originate.

II. Servicing fees typically range from 2 percent to 4 percent.
III. Most mortgage sales are with recourse.
IV. The government is involved in the residential mortgage markets.
A) I, III, and IV only

B) II, III, and IV only
C) I, II, and IV only
D) II and III only
E) I and IV only
Answer: E
Topic: Secondary Mortgage Market; Participants in the Mortgage Markets
Bloom's: Remember
Learning Goal: 07-06 Define a mortgage sale.; 07-07 Define a pass-through security.; 07-09
List the major mortgage holders in the United States.
17
37) Which of the following statements about GNMA is/are true?
I. GNMA provides timing insurance.

II. GNMA creates pools of mortgages and issues securities.
III. GNMA insures only FHA, VA, HUD's Office of Indian and Public Housing, and USDA
Rural Development loans.
IV. GNMA requires that all mortgages in the pool have the same interest rate.
A) I, II, III, and IV are true.

B) I, III, and IV only
C) I, II, and III only
D) II, III, and IV only
E) III and IV only
Answer: B
Bloom's: Remember
38) A $25,000 face value GNMA pass-through quote sheet lists a spread to average life of 103,
PSA of 220, and a price of 101-09. This means that
I. the pass-through yield is 103 basis points above the comparable maturity Treasury bond.
II. the pass-through is being prepaid more quickly than standard PSA.
III. the pass-through is priced at $25,272.50.
A) I, II, and III are correct.

B) I and II only
C) I and III only
D) II and III only
E) III only
Answer: B
Difficulty: 3 Hard
Bloom's: Understand
18
39) Mortgage fees paid by the homeowner at, or prior to, closing upon the purchase of a house
typically include all but which one of the following?
A) Application fee
B) Title search fee
C) Title insurance fee
D) Appraisal fee
E) Prepayment penalty
Answer: E
Difficulty: 1 Easy
Bloom's: Remember
40) An MBB differs from a CMO or a pass-through in that
I. the MBB does not result in the removal of mortgages from the balance sheet.
II. a MBB holder has no prepayment risk.
III. cash flows on a MBB are not directly passed through from mortgages.
A) I, II, and III

B) I and II only
C) II and III only
D) I and III only
E) I only
Answer: A
Difficulty: 3 Hard
Bloom's: Understand
19
41) One fixed-rate mortgage pool has a 750 PSA and a second fixed-rate pool has 150 PSA. The
pool with the higher PSA ________ than the pool with the lower PSA.
I. probably has a higher coupon

II. probably has lower default risk
III. will mature more quickly
A) I, II, and III

B) I and II only
C) II and III only
D) I and III only
E) I only
Answer: D
Difficulty: 3 Hard
Bloom's: Understand
42) As compared to fixed-rate mortgages, ARMs result in which of the following for the lender?
I. Higher interest rate risk

II. Lower default risk
III. Greater prepayment penalty fees
A) I, II, and III

B) I and II only
C) II and III only
D) I and III only
Answer: E
Bloom's: Understand
20
43) Which one of the following types of mortgages is likely to become more popular as the
average age of the U.S. population increases?
A) GEM
B) GPM
C) SAM
D) PLA
E) RAM
Answer: E
Difficulty: 1 Easy
Bloom's: Understand
44) Which one of the following entities is an actual government-owned enterprise dealing with
mortgages?
A) GNMA
B) FNMA
C) FHLMC
D) PIP
E) CMO
Answer: A
Difficulty: 1 Easy
Bloom's: Remember
45) A fixed-rate mortgage originator is adversely affected by ________ interest rates while the
borrower is adversely affected by ________ interest rates.
A) increasing; decreasing
B) increasing; increasing
C) decreasing; decreasing
D) decreasing; increasing
E) stable; decreasing
Answer: A
Difficulty: 3 Hard
Topic: Mortgage characteristics
Bloom's: Apply
21
46) An adjustable rate mortgage originator is adversely affected by ________ interest rates while
the borrower is adversely affected by ________ interest rates.
A) increasing; decreasing
B) increasing; increasing
C) decreasing; decreasing
D) decreasing; increasing
E) stable; decreasing
Answer: D
Difficulty: 3 Hard
Bloom's: Apply
47) The borrower of an amortized mortgage makes most of the payment during the early life of
the mortgage:
A) towards the principal.
B) towards the interest.
C) equally towards the principal and interest.
D) mostly towards the principal rather than interest.
Answer: B
Topic: Mortgage amortization
Bloom's: Remember
48) A Collateralized mortgage obligation (CMO) has:

A) no interest rate risk.
B) no default risk.
C) no prepayment risk.
D) high degree of interest rate risk.
E) no default, no prepayment and no interest rate risks.
Answer: D
Bloom's: Remember
22
49) If the current interest environment is low, lenders tend to prefer ________ ; while borrowers
tend to prefer ________.
A) ARM; fixed-rate mortgage
B) ARM; ARM
C) fixed-rate mortgage; fixed-rate mortgage
D) fixed-rate mortgage; ARM
Answer: A
Difficulty: 3 Hard
Bloom's: Apply
50) Construct an amortization schedule for the first three months and the final three months of
payments for a 30-year, 7 percent mortgage in the amount of $90,000. What percentage of the
third payment is principal? What percentage of the final payment is principal? What do these
differences imply? (Hint: The balance after the 357th payment is $1,775.56.)
Amortization Table:
# Payment Interest Principal Balance
0 $ 90,000.00
1 $ 598.77 $ 525.00 $ 73.77 $ 89,926.23
2 $ 598.77 $ 524.57 $ 74.20 $ 89,852.03
3 $ 598.77 $ 524.14 $ 74.64 $ 89,777.39
...
358 $ 598.77 $ 10.36 $ 588.41 $ 1,187.15
359 $ 598.77 $ 6.93 $ 591.85 $ 595.30
360 $ 598.77 $ 3.47 $ 595.30 $ 0.00
Answer: 12.46 percent of the third payment is principal and 99.42 percent of the last payment is
principal. In a long-term amortized loan, the early payments are almost entirely interest, and the
borrower's equity position grows only slowly at first, but, over time, more and more of the
payment goes to principal.
Difficulty: 3 Hard
AACSB: Reflective Thinking; Analytical Thinking
23
51) Why do mortgage lenders prefer ARMs while many borrowers prefer fixed-rate mortgages,
ceteris paribus.
Answer: With an ARM the homeowner bears the interest rate risk (not totally, because the
ARM is capped). From the lender's perspective, if deposit rates change, hopefully the ARM rate
will change and the lender's net profit will remain about the same. If deposit rates rise, the
homeowner's payments are also likely to rise, preserving at least some of the institution's profit
margin. With a fixed-rate mortgage the homeowner bears no out of pocket interest rate risk, but
the lender's profit margin will normally fall if rates rise, as their fund's cost will rise but
mortgage income stays the same.
Difficulty: 1 Easy
Bloom's: Understand
52) A homeowner is looking to buy a home in Marvin Gardens. The most he can afford to pay in
total is $1,800 per month. Yearly property taxes will be about $3,000 (escrowed monthly) and
insurance is $110 per month. There are no other costs.
If mortgage rates are 6.25 percent for a 30-year fixed-rate mortgage, how large can his mortgage
be?
Answer: Max monthly payment = $1,800 − $3,000/12 − $110 = $1,440

PV = $1,440 × PVIFA (6.25/12,360) = $233,874
PMT = 1,440
N = 360
FV = 0
I = 6.25/12 = 0.5208
Solve for PV = 233,873.60.

Bloom's: Analyze; Apply; Evaluate
24
53) A homeowner is looking to buy a home in Marvin Gardens. The most he can afford to pay in
total is $1,800 per month. Yearly property taxes will be about $3,000 (escrowed monthly) and
insurance is $110 per month. There are no other costs.
If his parents give him $20,000 for a down payment, what is the most he can pay for a house
with a 15-year mortgage if the interest rate is 5.50 percent?
Answer: Max monthly payment = $1,800 − $3,000/12 − $110 = $1,440

PV = $1,440 × PVIFA (5.50/12,180) = $176,237 + $20,000 = $196,237
PMT = 1,440
N = 180
FV = 0
I = 5.5/12 = 0.4583
Solve for PV = 176,236.59 and add the 20,000 down payment to get $196,236.59.
54) What three major ways has the federal government assisted the mortgage markets? Explain.
Answer:
1. By providing insurance for homeowners. This assists resale and securitization of mortgages
because secondary buyers don't have to engage in credit analysis of homeowners.
2. By sponsoring or creating pools of mortgages for securitization. This provides a national
source of funds to all regions of the economy.
3. By directly providing mortgage credit.
Topic: Primary Mortgage Market; Secondary Mortgage Market; Participants in the Mortgage
Markets
Bloom's: Understand
Learning Goal: 07-03 Identify the major characteristics of a mortgage.; 07-07 Define a pass-
through security.; 07-09 List the major mortgage holders in the United States.
25
55) Why have FNMA and Freddie Mac, considered government-sponsored enterprises (GSEs),
been in the news lately? Explain.
Answer: In the early 2000s, the agencies were in the news for excessive interest rate risk caused
by large derivatives positions, for overcharging lenders for services provided, and for accounting
irregularities designed to smooth earnings and/or generate bonuses for employees. Former Fed
Chairman Greenspan has also stated that these institutions were a source of risk for the economy
because of their ties to government and their extensive use of debt to finance growth. FNMA and
FHLMC (or Freddie Mac) have also become embroiled in the subprime mortgage crisis. In 2007
the value of their mortgage assets fell sharply. Shut out of the equity capital markets, FNMA and
Freddie Mac were still able to recapitalize by borrowing at favorable rates in public debt markets
(because of their quasi-government status [i.e., government-sponsored enterprise (GSE)], they
had low perceived credit risk). Even so, because of their inability to raise needed capital in the
public equity markets, their long-term viability remained a question. Finally, in September of
2008, the Federal Housing Finance Agency (FHFA), newly created by the Housing and
Economic Recovery Act of 2008, placed FNMA and FHLMC into conservatorship, which
effectively handed over operational control to the FHFA. Dividends were suspended and both
GSEs were delisted from the NYSE. The conservatorship will end only when the FHFA finds
that the GSEs are safe and solvent.
Improvements in the U.S. economy and the housing market have resulted in improved
performance for both Fannie Mae and Freddie Mac. By August 2017 the companies' stocks were
trading at $2.70 and $2.61, respectively, up from $0.97 to $0.98 at the beginning 2016. The two
GSEs have repaid substantial amounts of the loans from the U.S.Treasury and are expected to
remain profitable.
Difficulty: 3 Hard
Bloom's: Understand; Remember
26
56) Who are the major buyers of mortgages after they have been originated? What is the
difference between selling with recourse or without recourse? Which is most common?
Answer: The major buyers are:
1. investment banks.
2. vulture funds.
3. domestic banks.
4. foreign banks.
5. insurance companies.
6. pension funds.
7. closed-end bank loan mutual funds.
8. nonfinancial corporations.
Selling with recourse means the buyer of the mortgage can require the mortgage seller to repay
the mortgage if the homeowner defaults. A sale without recourse means the seller has no legal
liability in the event the homeowner defaults. Most sales are without recourse.
Topic: Secondary Mortgage Market; Participants in the Mortgage Markets
Bloom's: Understand; Remember
Learning Goal: 07-06 Define a mortgage sale.; 07-09 List the major mortgage holders in the
United States.
57) How does GNMA improve mortgage marketability?
Answer: GNMA sponsors pools of FHA- or VA-insured mortgages and provides timing
insurance to investors (ensures the timely receipt of promised cash flows in the event of
homeowner default). GNMA allows private pool organizers to issue securities backed by the
mortgage pool that bear GNMA's name. The GNMA name tells investors there is no credit risk
and that the securities are actively traded.
Bloom's: Understand
27
58) Explain each term of the following pass-through quote:
15 year Price Avg Life PSA

FMAC Gold 7.0% 97-31 5.9 150
Answer: FMAC Gold 7.0 percent: a pass-through issued by Freddie Mac; maximum payment
delay is 55 days. The coupon rate is 7 percent.
97-31 price on pass-through (paid monthly) is 97.9875 percent of par.
5.9 years average life of security based on prepayment patterns.
PSA 150 means that the mortgage holders are prepaying at a rate 50 percent faster than the
benchmark prepayment rate (PSA = 100).
Difficulty: 3 Hard
Bloom's: Understand
28
59) You bought your house five years ago and you believe you will be in the house only about
five more years before it gets too small for your family. Your original home value when you
bought it was $250,000, you paid 20 percent down, and you financed closing costs equal to 3
percent of the mortgage amount. The mortgage was a 30-year fixed-rate mortgage with a 6.5
percent annual interest rate. Rates on 30-year mortgages are now at 5 percent if you pay 2 points.
Your refinancing costs will be 1.5 percent of the new mortgage amount (excluding points). You
won't finance the points and closing costs this time. A new down payment is not required.
Should you refinance? Ignore all taxes and show your work.
29
Answer: Find the original payment and then find what you owe now:
0.80 × 250,000 × 1.03 = Pmt × PVIFA (6.5/12,360); Pmt = $1,302.06
Balance now = $1,302.06 × PVIFA(6.5/12,300); Balance now = $192,838.61
New payment if refinance
$192,838.61 = Pmt × PVIFA (5/12,360); Pmt = $1,035.2
Pmt savings = $1,302.06 − $1,035.2 = $266.86 per month
Refinancing costs = (2% + 1.5%) × $192,838.61 = $6,749.35
Find breakeven time:
$6,749.35 = $266.86 × PVIFA (5/12, N); N = 26.78 months ≈ 27 months/12 ≈ 2.25 years. You
plan on being in the house for five more years, so it is worthwhile to refinance.
PV = 206,000
I = 6.5/12 = 0.5417
N = 360
FV = 0
Solve for PMT to get 1,302.06; using P1 = 1 and P2 = 60, find the balance left on this loan which
is 192,838.61.
The new loan will have a payment of:
PV = 192,838.61
I = 5/12 = 0.4167
N = 360
FV = 0
Solve for the PMT to get 1,035.20.
So the savings on monthly payments will be 1,302.06 − 1,035.20 = 266.86.
The refinancing costs on the new mortgage will be 0.035 × 192,838.61 = 6,749.35. If you will
leave in this house only 5 more years, find whether $6,749.35 is worth paying today.
Solve for the number of years required to recover this $6,749.35 cost today:
PV = − 6,749.35
I = 5/12 = 0.4167
PMT = 266.86
FV = 0
Solve for N to get 26.78 months which is equivalent to 2.23 years which is less than the 5 years
period you intend to stay in the house, so it is worth refinancing.
Difficulty: 3 Hard
30
60) Why were CMOs created?
Answer: Some investors desired more protection from prepayment risk than offered by pass-
throughs. The creation of different payment tranches in a CMO allows investors to better tailor
their prepayment risk exposure.
Bloom's: Understand
31
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behind him, and a moment later the crunching of wheels on the
gravel became distinctly audible.
“I would not overdo it,” said Lady Georgina, looking at Nance.
“Overdo what?” she answered somewhat proudly.
“Well, you know you feel horribly lonely without that good fellow. I
never saw anything more plucky in my life than the way you
subdued your feelings and let him go away without a murmur, but
you need not mind me—I am the soul of frankness—the essence of
openness. I always say what I think and show what I feel. You can
copy me. It strikes me, by the way, that you and I are going to be
friends.”
“I hope so,” said Nancy.
“I know it, that is, if you will have me. I am a good friend, Mrs.
Rowton, and a very nasty enemy. You may as well take me as a
friend, will you?”
“You are Adrian’s friend, and you shall be mine,” said Nancy.
“That is right. Now, look here, child. I am not going to leave you
to your own miserable feelings for the rest of the day. I know that
good man you have married fifty times better than you do.”
“I can scarcely allow you to think that,” said Nancy.
“Oh! tut, tut, of course, I don’t mean the love-making side of him.
He never would make love to anybody, although half the girls round
the Heights had a try for it in the old days; but I know a side of him
that you do not know. He is restless, he is essentially a rover—a gay
rover, we all call him here. You must get accustomed to his vanishing
in the peculiar way he has just vanished—he will come back as
suddenly; without the least warning, any day or any hour the
sunshine of his presence will once more light up the house. Now,
come for a walk in the grounds—and, oh! by the way, pray invite me
to dinner.”
Nancy could scarcely forbear from smiling.
“Will you stay?” she asked.
“Scarcely a cordial invitation,” said Lady Georgina, biting her lips
and smiling; “all the same I shall accept it. If you will excuse me, I’ll
just go and speak to my groom; he can take Dandy round to the
stables. I need not send for a dinner dress, need I?”
“Oh, no; stay as you are,” said Nance. She felt slightly stunned,
but Lady Georgina’s presence forced her to rouse herself.
They went into the grounds. The day was sunshiny, and the first
signs of spring began to be apparent in some delicate buds of green
which were coming out on the ribes and other of the hardiest
shrubs. As they walked side by side, Lady Georgina kept up a flow of
small talk. She was a woman of considerable character, although at
first sight she appeared to be nothing but froth and frivolity. She had
a kindly and sterling heart. She knew more about Rowton than he
had any idea of, and she pitied Nance from the bottom of her heart.
“How pretty she is!” she said to herself. “Anyone can see that she
is madly in love with that handsome lion. Poor child, what will her
future be? If my suspicions are correct, what chance has she of
lasting happiness? Well, I like her husband, whatever his failings,
and I am going to like her.”
Accordingly Lady Georgina put out her really great powers, and
before long Nance had submitted to her charm. They walked about
for over an hour and then came in to tea. Afterwards Nance took her
guest up to her bedroom.
Hester entered to attend to the ladies. When she had withdrawn
Lady Georgina spoke about her to Nance.
“I know that girl,” she said; “her name is Hester Winsome. She
used to be one of my favourite pupils in the village school. She went
off to London when she was fifteen. I have heard things of her
since, which were not absolutely in her favour. Why have you
engaged her as your maid?”
“I do not know anything about it,” said Nance. “Mrs. Ferguson
brought her to me on the night of my arrival. She told me she was a
girl from the village who had been thoroughly trained in London.”
“Oh! I don’t doubt the training,” said Lady Georgina. “I think she
got a start when she saw me—she pretended not to recognise me.
Frankly, I don’t like her.”
“Nor do I in my heart,” said Nancy; “but she is very attentive and
clever.”
“Clever! too clever,” said Lady Georgina. “Don’t let her pry into
your secrets.”
“My secrets—I have none,” said Nance. Then she paused and
coloured crimson. She remembered the great secret which pressed
upon her day and night.
“Why do you get so red, child?” said Lady Georgina. “You say you
have no secrets, but your face says you have. Now, don’t tempt me.
If I have a fault, it is curiosity, inordinate curiosity. I never betray a
friend, and once I know the truth I never question, and never, never
pry; but until I know the truth I am—well, I cannot help it—
troublesome. Don’t show me a little, Nance Rowton, for if you do I
shall poke out all.”
“I am sure you won’t,” said Nancy—“you are too much of a lady.”
“Now, was there ever such a snub!” said Lady Georgina, tapping
her foot somewhat impatiently on the floor as she spoke. “Child, you
are quite refreshing. If you speak in that frank way to everyone else
you will bowl all the county over; but I hear wheels—more visitors—
come along down and I will help you to entertain them.”
Until quite late in the afternoon, until the winter’s day had faded
into dark, Nance and Lady Georgina, or rather Lady Georgina herself,
entertained the county at Rowton Heights.
Each neighbour with the least pretensions to gentility hastened to
pay respect to Rowton’s fair bride.
“You must begin to return all these visits in a few days,” said Lady
Georgina.
“I cannot until Adrian comes back,” said Nance.
“Oh! nonsense, you must manage to lead an interested and happy
life apart from that husband of yours.”
“No, I won’t,” said Nance proudly.
“Oh! you won’t. You will sing a different tune after a time. I tell
you, Mrs. Rowton, he has got his own pursuits, and he will follow
them to the death in spite of you or twenty girls like you, and you’ll
die of ennui if you have not your own individual interests. You must
begin to return these calls by the end of the week, and then
invitations will pour in. If Mr. Rowton is at home he will go with you,
if not, you must go by yourself or with me. I shall be delighted to
chaperone you to any extent.”
Nance bowed her head somewhat wearily. A good deal of Lady
Georgina’s gay chatter was scarcely heard by her. She admitted all
the kindness, but her heart was sore, and she longed indescribably
to be alone. When the good lady at last took her leave, Nancy could
not help giving vent to a sigh of relief. Soon afterwards she went
upstairs to bed.
On the way to her own room, just outside the door she came face
to face with her maid, Hester, who was talking to an elderly woman,
with sandy hair and a broad freckled face. The woman had straight
lips, a jaw of iron, and pale light blue eyes. She was dressed very
neatly, but not in the dress of an ordinary servant. Her hair was
tightly braided and she wore it perfectly smooth.
“Well, good night, Leah,” said Hester, as Mrs. Rowton appeared on
the scene.
The woman called Leah favoured Nancy with a prolonged and
undoubtedly curious stare.
“Good evening, ma’am,” she said; then she dropped a curtsey and
disappeared down a passage.
“Who is that?” asked Nancy of Hester.
“She is the caretaker of the poor mad lady,” replied Hester.
“Then what is she doing in this part of the house?”
“She was only talking to me about her charge, Mrs. Rowton. She
says that poor Mrs. Cameron is very queer to-night, and Leah
wanted to know if I would go and help her to sit up with her.”
“Well, of course you won’t, Hester,” said Nance. “I do not know
anything about the case, but you surely want your night’s rest, and I
am sure Mr. Rowton——”
“Oh!” said Hester, with a toss of her head, “Mr. Rowton would not
interfere with a thing of this sort. Leah does want help at times, for
Mrs. Cameron is terribly violent. Indeed, I cannot make out why she
is not put into an asylum like other mad ladies.”
“It is not your business to discuss that question,” replied Nance.
“Of course not, ma’am, and I am sorry I forgot myself.” Hester
spoke in a subdued voice; she turned her back on Nance, who did
not see the angry and vindictive flash in her eyes. “Shall I take down
your hair now, ma’am?” she asked, speaking in a tone almost of
servility.
“Thank you, no, I prefer to wait on myself to-night.”
“As you please, ma’am. I have left everything ready and
comfortable in your bedroom. You are quite sure you would not like
me to help you to get into bed?”
“Quite sure, thank you.”
“Very well, ma’am, then I think with your permission I’ll go to
Leah; I am not at all nervous with the insane, but Leah, strong as
she looks, gets quite overpowered at times.”
“But surely Leah has not the care of Mrs. Cameron by herself?”
asked Nance. The words were almost forced from her, for she had
the greatest dislike to discussing the matter with Hester.
“Oh! yes, ma’am, I assure you it is so—those two always sleep
alone in the Queen Anne wing. After all, it is only occasionally that it
is necessary for Leah to have assistance. Well, I’ll go to her now—I
like to be good-natured.”
“Good night,” said Nance.
“Good night, madam; I hope you’ll sleep well.”
CHAPTER XVI.
THE LADY IN THE WOOD.
True to her promise Lady Georgina arrived at nine o’clock the

following day to take Nance for a ride. They had an hour and a half
of vigorous exercise, and Mrs. Rowton returned home with spirits
raised in spite of herself. A letter from her husband awaited her—it
was dated from a big London hotel and was written late the evening
before. She seized it, opened it eagerly, and with eyes full of
passionate love and anxiety, devoured the contents. The letter was
short, and although every word breathed affection, there was little
or no information to be obtained from the hurried scrawl.
“I am leaving England, Nance, for a short time,” wrote her

husband. “I cannot give you any information with regard to
where I am going. In short, my darling must make up her
mind to do without hearing from me for a few weeks. I know
this is hard on you, Nance, as it also is on me. The fates are
bitterly hard on us both, but we married, did we not,
accepting the position, and we must now endeavour to make
the best of things. Unexpectedly some day I shall be again at
your side. Meanwhile, believe that I am well, very well;
believe that I will take all possible care of myself, for your
sweet sake; believe also, that all my heart is yours—my best
thoughts are yours. Good-bye, my angel.
“Your loving
“Adrian.
“P.S.—Do not mention to anyone that I am out of England
for a time. You can say, if questioned, that I am detained on
business in town.”
“No, I won’t tell a lie,” said Nance to herself proudly.
She did not add any more. Even with her own anxious, beating
heart, she refused to commune over the contents of her letter. A
flush burned on either cheek, her eyes grew bright, with the
brightness which often precedes tears, but no tears came to them.
She read the brief letter over twice, then folded it up and slipped it
into her pocket.
As she did this she noticed that Murray had come into the room,
that he had observed her action, and that his bold eyes, so like her
husband’s, were fixed on her face.
“Don’t look at me like that, Murray,” she said with a note in her
voice which sounded like a sob.
For answer the boy sprang to her side.
“Cry if you want to, auntie,” he said. “I know you want to. That
letter was from Uncle Adrian, was it not?”
“Yes, Murray.”
“And he told you that he must be away from home for a little?”
“Yes, dear. We won’t talk of it now.”
“But why not?” said Murray. “Why not talk of it to me? You see I
am accustomed to the sort of thing, Aunt Nancy; when I was young,
quite a little fellow, I had a mad, passionate feeling for Uncle Adrian,
and when he went away as he has done now and would give no
address, I used nearly to go wild. I used to stray off all by myself
and have a terrible time. But by-and-by, I saw it was foolish to make
myself ill. He always came back again, and I was glad, very glad, to
see him. I thought him perfect then,” concluded the boy.
“And you don’t think him perfect now?” said Nance.
He looked full at her, shut up his lips and was silent.
“I think you perfect,” he said after a long pause. “Don’t fret too
much, Aunt Nancy; but if you do fret, talk about it all to me, for
though I am a boy in years, some things have happened—yes, they
have happened here at beautiful Rowton Heights—which have
turned me into a man. There are times when I think I am almost an
old man, for I feel quite a weight of care, although, of course, I
don’t talk of it. Don’t keep your grief too much to yourself, Aunt
Nancy, and be sure of one thing—that Uncle Adrian will come back.
Some day he’ll walk into the room. He’ll just whistle as he knows
how, and open the door and come in, and then it will be all
sunshine.”
“You are a dear little chap,” said Nancy, bending forward and
kissing him.
He flushed when she did so.
“I love you so much,” he said enthusiastically. “Now I am the man
and I shall look after you. Have you eaten anything since you had
your ride?”
“No; I had breakfast quite early and I am not hungry.”
“But that will never do. You must have some wine and a biscuit.
Uncle Adrian would wish it. Of course, he intended me to take great
care of you. It must have been an awful comfort to him to feel that I
was about when he had to leave you. I know where the wine is—I’ll
go and fetch it.”
He ran off and returned in a moment or two with a glass of port
and a box of biscuits.
Nancy drank off the wine and felt all the better.
“Now you are to come out with me,” said the boy. “I have planned
our day. My tutor, Mr. Dixon, is not coming at all to-day. Uncle Adrian
said I might have two days’ holiday in order to look properly after
you, and won’t we have a good time of it! Are you up to a long, long
walk?”
“Yes, anything,” said Nance. “Anything is better than the house.”
“Of course it is, and the day is so lovely. Well, come along, we’ll
make for the Rowton Woods. The road is all uphill, remember. You
will be pretty dead beat by the time you get there. Suppose we take
some luncheon with us?”
“Yes, that will be capital,” said Nancy; “much better than coming
back to a stately lunch here.”
“Oh! much better,” answered Murray, with a gleeful laugh. “I’ll run
and order sandwiches and a basket of grapes. Stay where you are,
auntie; I’ll be with you soon.”
Half an hour later the pair started off. Murray carried the grapes,
and Nance the basket of sandwiches. They looked like two children
as they crossed the grounds, passed through a stile, and found
themselves in a low-lying meadow which led to the opening which
by-and-by was to bring them into the famous Rowton Woods. In
spite of her grief, in spite of the fact that her husband’s letter, his
mysterious letter, lay in her pocket unanswered because it was
impossible for her to answer it, Nancy’s spirits rose. Her little
companion was too healthy and charming not to exercise a
beneficial effect over her. Soon his gay laughter evoked hers, and
Nance found it possible to endure life even though Adrian was away.
“I wish, Murray,” she said, as presently they turned their steps
homeward, “that you and I might have the Heights all to ourselves. I
should never be lonely if I had plenty of your society.”
“I love to hear you say that,” answered the boy.
“Ha! ha!” laughed a voice in their ears.
The sound seemed to come from the ground beneath them. They
turned instinctively and saw a lady seated under a large tree. She
was dressed somewhat peculiarly in a neat little bonnet and mantle
of old-world cut, and a black alpaca dress. She wore cotton gloves,
and although it was winter and the sun was about to set, held a
parasol, made of some light fancy silk, over her head.
Nancy first thought that this peculiarly-dressed woman was one of
her neighbours. Murray touched her arm, however, and when she
glanced at him, she was forced to draw a different conclusion. His
handsome little face had turned deadly white.
“Go on, auntie,” he said in a whisper. “Don’t be a bit frightened.
Just go on quite quietly through the wood. I’ll follow you in a
moment.”
“But who is that lady, Murray?”
“My mother,” answered the boy. “I must speak to her. I am not a
bit afraid.”
“But I am—it is not safe for you to be alone, I won’t leave you,”
said Nancy, her voice shaking in spite of herself.
“Ha! ha! what a nice little conversation you two are having,” said
the eccentric-looking lady, rising to her feet as she spoke and going
towards Nancy. “You are frightened, my pretty girl, although you try
not to show it. Well, perhaps you have cause. I know very well that
there are times when I am very dangerous. At times, too, I have got
unnatural strength. But it so happens that to-day I am in a quiet and
tractable mood.”
“Let me take you home, mother,” said Murray. He ran up to her
side and laid his hand on her arm.
She shook it off with a sudden fierce gesture.
“Don’t touch me,” she shrieked; “you are the boy. It was on
account of you I got into all that trouble. I won’t speak to you! I
won’t look at you! Get out of my sight—go, at once!”
Her eyes, hitherto quiet, and, although somewhat wandering in
their expression, intelligent enough, began to blaze now with a fierce
and terrible fury.
“Go, Murray,” said Nancy; “go quickly back to the house. Your
presence excites your poor mother. No; I am not frightened now.
Go, dear, no harm will happen to me.”
“Yes, go, Murray Cameron,” shrieked his mother. “I don’t want you
about. When I look at you, mischievous, wild, uncontrollable
thoughts come into my head. Run away, child—get out of my sight
as quickly as you can. I have come here on purpose to speak to this
young lady, and I won’t be foiled by twenty little chaps like you. Go
away, go at once.”
Nance nodded her head emphatically to the boy. He glanced from
the mad to the sane woman, and then turning abruptly, walked
down the hill. When he had gone a little distance he slipped behind
a tree and waited with a palpitating heart for the issue of events.
The moment he was out of sight, Mrs. Cameron strode straight up
to Nance and laid her hand on her arm.
“Look at me,” she said.
With an effort Nancy raised her frightened eyes.
“I have no reason to dislike you,” said the mad woman, “and you
need not fear me. I am anxious to have a right good stare at you,
though. I am devoured with curiosity about you.”
“Well, here I am,” said Nance.
“Here you are, indeed. What a finicking sort of voice you have,
and your face, although pretty, is not worth much. Perhaps I am
wrong though—you have an obstinate chin—I am glad you have an
obstinate chin. You may possibly have strength of character. I hate
people without strength of character.”
As she spoke, the woman placed her hand under Nancy’s chin,
raised her face and looked full into it. Her dancing wild eyes scanned
each feature. Presently she turned away laughing again.
“I do not hate you,” she said; “after all, you are harmless—you
cannot interfere with me. I hate your husband, though, and I hate
Murray Cameron.”
“But Murray is your child,” said Nancy, shocked.
“He is; but he has interfered with me, and I hate him. It was after
his birth I went off my head. Have I not good reason to dislike one
who did me an injury of that sort? I loved the boy’s father. Pah! what
am I talking about? Love was my undoing. Yes, I have had a strange
history. I’ll tell you my story some day, Mrs. Adrian Rowton. You
must come and see me some day in the Queen Anne wing.”
“Well, let me take you home now,” said Nance in a soothing tone.
“You have quite an agreeable way of speaking; and as you are not
related to me by any blood ties, I am willing to be civil to you. Call
out to that boy to get out of my sight—I know he is hiding behind
that tree yonder. You are perfectly safe—I would not hurt a hair of
your pretty head. But he is different.”
“Go home, Murray,” called out Nance.
He gave a low whistle in answer, and they heard his footsteps
vanishing down the hill.
“Now that is right,” said the mad woman, breathing a sigh of
relief. “Now I can really talk to you. Would you like to know why I
am not confined in an asylum? Would you like to know why I am
kept in that dull Queen Anne wing? You could not guess the reason,
but I will tell it to you.”
“You shall some day,” said Nancy; “but now let me take you
home.”
“I will tell you before I go. I have followed you on purpose to tell
you. Do you know what you did when you married Adrian Rowton?”
“Made myself very happy,” said Nancy in a faltering voice.
“So you think, you poor goose. Do you know what Adrian Rowton
is?”
“I would rather you did not tell me.”
“Ha! ha! you are frightened, my pretty little dear. That good
husband of yours is away from home and he won’t give you his
address. Ha! ha! he says he will come back again unexpectedly, does
he not? Ha! ha! ha! Well, so he will. Now you ask him a question
when he returns—ask him what goes on in the Queen Anne wing at
night—in the cellars, I mean. There are big cellars under that part of
the house—ask him what they are used for. Ask him, too, why his
mad sister is not put into an asylum; why she is used as a—ha! ha!
—a blind—ha! ha!”
“Now, madam, what nonsense this is. Come home this minute.
You shall suffer for this conduct.”
A strong voice rose on the air, firm steps were heard approaching.
The poor mad lady glanced round with a wild expression; suddenly
she clung close to Nance.
“Save me, save me!” she gasped; “that is Leah’s voice. At times
she is awfully cruel to me. Sometimes she beats me. Oh, save me!”
The poor creature’s voice rang out on the air with a wild scream.
CHAPTER XVII.
CROSSLEY.
The woman whom Nance had seen the night before came forward
with quick strides.
“None of this folly, Mrs. Cameron,” she said in a powerful voice.
“Leave that young lady alone this minute, or you know perfectly well
what will happen. Now take my arm. You have disobeyed me and
you know you must be punished.”
The miserable creature seemed to shrink and collapse into herself.
She gave Nance a piteous look.
Nance’s kind heart was immediately touched.
“Do not be hard on her,” she said, speaking to Leah; “she really
meant no harm. She came out on purpose to see me. She was
curious, I suppose—it was perfectly natural, was it not?”
“Yes, yes, that is it—it was perfectly natural,” said the mad
woman. “You hear her, Leah, she said I meant no harm. I only came
out to tell her what she ought to know. For instance—the cellars.”
“Hold your tongue this minute,” said Leah. “If you’ll have the
goodness, madam,” she continued, addressing Mrs. Rowton, “to
leave us now, I think I can take Mrs. Cameron home quietly. She
was excited last night and is not quite herself. Of course, you know
well enough, that anything she may tell you is not of the slightest
consequence.”
“Ha! ha! Leah, you know better than that,” laughed Mrs. Cameron.
Her laugh was so wild that it was blood-curdling.
“Good-bye,” said Nance in a kind and steady voice. She held out
her hand, and the mad lady seized it in a fierce grip.
“I like you—I love you,” she said. “Yes, yes, even I—even I can
love, and I love you—you are a sweet little girl. I’ll be your friend. Be
sure you come to me when you really want a friend. Good-bye,
good-bye, pretty little Mrs. Rowton.”
She turned as she spoke, and Nance walked away through the
wood. She had been brave enough during the interview, but now
she trembled exceedingly. She felt suddenly quite weak and faint.
When Murray discovered her, she was leaning against a tree too
exhausted to proceed on her walk.
The boy’s eyes were red as if he had been crying, but when he
saw Nance a smile flitted bravely across his face.
“Oh! don’t think about me,” he said. “I am so glad you are safe. Of
course, you got a fright—you are not accustomed to this sort of
thing. I am—I mean there have often been scenes like this one, and
mother has said dreadful things of me. It is rather hard to hear your
own mother speak of you like that, is it not? but I know she does
not mean it—it is just her awful affliction. I love her very much.
There is nothing I would not do for her. She has been very badly
used, but I will not go into that now. May I take you home?”
“Yes, Murray, I am dreadfully tired,” said Nance in a faint voice.
Murray gave her his shoulder to lean on.
“Lean hard,” he said; “I am a splendid stick.”
By and-by they reached the house and Nance went away to her
own room. She lay down on her bed and made a great effort to shut
away all thought. This was by no means easy. There was much to
think about—much to puzzle and perplex her. Her husband’s
mysterious absence; the near vicinity of the poor insane lady; the
strange words which the lady had used: “I am here as a blind. Ask
Adrian Rowton what goes on in the cellars at night.” What did it all
mean? What could it mean? Nancy’s heart beat with great throbs—
she felt excited and terribly overwrought. Her adventures, however,
were by no means at an end. She was just falling off into a restful
doze, when the door of her bedroom was softly opened, and her
maid, Hester, advanced across the room on tiptoe.
Nancy’s antipathy to this girl was decidedly on the increase, and
she now raised her head and spoke almost irritably.
“What is it, Hester?” she said.
The girl approached the bedside with alacrity.
“I just came in to find out whether you were asleep or not,
madam,” she said. “I am glad you are awake, for there is a man
downstairs. I suppose he is a gentleman, but I cannot say. Anyhow
he has called to see you. He said I was to tell you that Mr. Crossley
was below.”
“Crossley,” said Nance with a start. She sat up in bed. A queer look
came into her eyes.
“When did he call?” she asked the girl.
“Half an hour ago, ma’am, I believe. Vickers has shown him in the
library. He said he would wait your convenience.”
“Go to Vickers and tell him to say to Mr. Crossley that I will be with
him in a few minutes,” replied Nance.
The girl left the room, walking with her usual absolutely noiseless
tread.
“Mr. Crossley,” murmured Nance.
All her depression left her on the moment. Her thoughts were
completely turned into a new channel. Since her father’s death she
had lived in a dream of excitement, of adventure, of golden bliss. It
was true lurid lights were coming into this dream of hers; but the
subject of all her young life hitherto had been banished from view.
Now she remembered it with a pang and a thrill—a pang of deep
pain and self-reproach, a thrill of excitement. She thought of her
father when he lay dying. She remembered the mission which had
been given to her. Her promise to her dying father was abundantly
recalled by the mere mention of Crossley’s name.
She had taken off her dress, but she soon replaced it. She
brushed out her beautiful hair, gave one glance at herself in the long
mirror and ran downstairs.
Nance knew Crossley, the detective—she had often seen him
before. During the six years she had lived with her father at the
Grange, he had come to see them as a rule three or four times a
year. At each interview she had been present. It was perfectly true
that she and her father had indeed stood side by side in their
intense eagerness to track the man who had sent Anthony to an
early grave. She was with her father now, heart and soul. Her
beautiful eyes shone as she entered the library.
“Mr. Crossley, I am glad to see you,” she said.
Crossley, a stout middle-aged man, with grizzly hair and bushy
whiskers, came out of the recess of one of the windows. He made a
low bow to the mistress of Rowton Heights.
“I thought it best to call, madam,” he said. “Since the letter which
you wrote to me announcing Dr. Follett’s death, I have been actively
pursuing inquiries, and with, I believe, a certain measure of success.
In short, I am now in possession of facts which can really lead to the
ultimate discovery of——”
“Hubert Lefroy?” interrupted Nance.
“Yes, or the man who called himself Hubert Lefroy.”
“You are certain, then, that the name is a feigned one?”
“I am positive; but do not say the word so loud—there may be
listeners about.”
“Oh! no, that is impossible,” said Nance, but she glanced nervously
behind her back as she spoke. “I am very glad you came,” she said;
“sit down, won’t you? My husband is away from home at present.”
“I am aware of that fact,” answered Crossley.
“Are you? How did you find out?”
“In the usual way, madam. When I take up a case of this kind I
employ emissaries all over the country, and nothing takes place with
regard to my clients’ movements that I am not acquainted with. Your
father’s strange case has, as you are aware, Mrs. Rowton, occupied
my best attention for many years. During his lifetime, owing to the
absence of almost all clues, we have been unsuccessful in bringing
matters to an issue. But since his death unexpected developments
have taken place, and these I may as well own have startled me
considerably. I must repeat the words which I have already uttered
—I am, I believe, in a position to lay my hands on the man who
murdered your brother.”
“Then why don’t you do it?” said Nancy. “This excites me very
much,” she continued. She rose as she spoke, tugged at the neck of
her dress as though she felt her breathing a little difficult, and then
crossed the room to one of the windows.
“You understand my position,” she said after a pause. “I am my
father’s representative. It is my painful duty to carry out this search
to the bitter end.”
“Is it your duty?” asked Crossley.
“Is it my duty?” repeated the young lady; “need you ask? I am
under a vow.”
The detective gave Nance a long and earnest gaze. He had one of
those faces extremely difficult to read. It was smooth in outline,
commonplace in expression; it was a contented, slightly self-satisfied
face; the eyes were well open and of a serene tone of blue; the
mouth was hidden by a thick short moustache. Crossley was the sort
of man who would pass anywhere without exciting the least
attention. He had the sort of physiognomy which thousands of other
people possess. No one to look at him would suppose for a moment
that he was one of the shrewdest detectives of his day—a man
practically at the head of his profession—keen to read motives,
capable of looking down into the hearts of many apparently
inexplicable mysteries.
While he gave Nance one of his slow and apparently indifferent
glances, he was really looking into her troubled heart.
“You are a happy young married lady now,” he said after a pause.
“Yes, yes, I am very happy,” she said, clasping her hands.
“You are much attached to your good husband, madam?”
“Need you ask?” Her eyes filled slowly with tears.
“Then for Heaven’s sake, Mrs. Rowton,” said the detective,
speaking in an altogether new voice for him, “give this matter up, let
it drop. Nay, hear me out”—he raised his hand to interrupt a flow of
words which were rushing to Nancy’s lips—“I am speaking against
myself and against my own interests when I so advise you; but I am
not without heart, madam, and I have seen in the past how sad your
life was and how you suffered. It is my profession to hunt down
criminals—to scent crime to its source. In this case let me do what is
contrary to my profession—let me leave the curtain unlifted. Mrs.
Rowton, may I persuade you to leave justice and revenge in this
special case to Heaven?”
“I cannot,” said Nance. “I am amazed to hear you speak in that
tone—you, of all people. I cannot possibly do it. What do you mean?
What can you mean?”
“What I say, madam. I will tell you quite frankly why I came here
to-day. I came to Rowton Heights for a double purpose. I am, I
believe, in possession at last of a valuable clue which may lead to
the arrest of the man who took your brother’s life; but I find on
looking into matters that there are complications in connection with
this search, and because of these, I would earnestly beg of you,
from a friendly point of view, to give up the search. Now, Mrs.
Rowton, I shall not explain myself. Once again I beg of you to let the
matter drop. Do not carry on this search any further.”
“I wonder at you,” said Nance, with sparkling eyes; “and you call
yourself a professional detective!”
“I do, madam, I do; but even a professional detective may have a
heart.”
“Well, listen to me,” said Nance. “I hate the man who killed my
brother. Two passions move me—love for my husband, and hatred
for the man who killed my young brother. When I think of that
ruffian I have no heart; when I think of my ruined father’s life, of my
brother’s shameful death, I have no heart—none. I am under a vow
to the dead. I must carry on this search. Do you understand me?”
“I do, Mrs. Rowton. Well, I have done my duty in recommending
mercy to you. Some day you may regret that you have not listened
to me.”
“I shall never regret it. Now let us drop this side of the question.
You have a clue—tell me all about it.”
CHAPTER XVIII.
THE TORN LETTER AND THE MARK.
Crossley heaved a sigh, took his handkerchief out of his pocket,

wiped some drops of moisture from his brow, and then began to
speak in a dry, business-like tone.
“You know how very slight our clues have been up to the
present?” he said after a pause. “Your brother was murdered in a
café in Paris; murderer unknown; motive of the crime unknown. A
man who is now in his grave appeared on the scene half-an-hour
after the murder was committed. He found close to the body of the
murdered man half a sheet of paper on which something in cipher
was written, and at the foot of the cipher in place of signature were
some very peculiar hieroglyphics. That piece of paper has lain in my
possession for years. I have studied the cipher and the hieroglyphics
which stood in place of a signature with the utmost care. I have
transposed the alphabet in all manner of ways, not only at my office
when I had a moment to spare, but over my evening pipe at home.
With infinite trouble I have made out a few words, but nothing to
give me any clue to the identity of the man to whom the paper
belonged.
“The gentleman who is now dead and who appeared on the scene
of the murder half an-hour after it was committed, says he saw a
man leaving the café who looked much excited—was dark, and of
unusual height and breadth. His attention was attracted to this man
because he wore no hat, and he had also a peculiar mark above his
upper lip. He described the mark as something in the shape of a
death’s head and cross-bones, but could not positively be sure on
that point. By evidence taken at the time it was made abundantly
plain that this man must have been the murderer. He has never been
captured, and our only chance of finding him consists in following up
the clue which the mysterious paper in my possession can give us.
“There is little or no doubt either that the murder was
premeditated, as the writing was an appointment, bringing the
murdered man to the spot. My business, therefore, Mrs. Rowton, is
to find the man who wrote the letter, and who has that peculiar
mark on his face.”
“Yes,” said Nance, with some impatience. “Remember,” she added,
“that I have heard all this discussed many, many times.”
“Yes, madam.”
“And have you nothing further to say?”
“A little more. Have you any objection to my locking the door?”
“Certainly not. But is it necessary? No one will disturb us during
our interview.”
“I am none so sure of that,” replied the detective. “There is a
young woman in this house who would think very little of
eavesdropping.”
“Whom do you mean?” asked Nance with a start.
“A dark-eyed slip of a girl, madam—she came into this room a few
minutes ago to fetch a book. I looked at her and she looked at me.
If ever a face had cunning in it, hers is the one.”
“My maid, Hester Winsome,” thought Nance to herself.
Aloud she said: “Well, lock the door, and we shall be safe.”
Crossley did so.
As he resumed his seat, he said:
“I have something of great interest to tell you, madam. I have
lately arrested a man who belongs to a notorious school of burglars
—he was discovered uttering a forged cheque. In searching his
house I found a similar half sheet of paper to that already in my
possession, with the same cipher and the same hieroglyphics.”
“Impossible!” said Nance, springing to her feet, and speaking in
great excitement. “Then you have really found the man?”
“Pray sit down, Mrs. Rowton. I have not found the man, but I
have found a clue which may lead to him. Now I want you to allow
me take certain steps in order to make my suspicion a certainty.”
“What are they?”
“I want, with your permission, to locate a member of my staff at
Rowton Heights.”
“You do! What can you possibly mean?”
“Simply what I say, Mrs. Rowton. In order to make my suspicion a
certainty a member of my staff must come here.”
“But why?”
“I would rather not say at present. Remember, young lady, that I
have asked you to give up this search—you wish to continue it to the
bitter end. The clue which I have unexpectedly acquired points to a
certain track—that track lies red and hot round Rowton Heights.”
“You excite and terrify me,” said Nance, turning white as death.
“Even now, ma’am, we can drop the whole thing.”
“Never, never; my heart palpitates with eagerness to go on. Oh!
that I could find that coward, that ruffian, that assassin! If it is
necessary for your purpose to send a man here, let him come.”
“I thank you, Mrs. Rowton. The question now to consider is, in
what guise he had best appear on the scene.”
“Do you mean to imply that the man we are seeking for is in this
house?”
“I mean to imply nothing of the kind, young lady. I believe,
however, that a member of my staff may do good work if his
headquarters are here for a short time.”
“He shall come,” said Nance, “he shall come. Send him down at
once.”
“It would be fatal to our purpose, madam, if the least suspicion
were aroused. Now let me think. Can you manage another
footman?”
“I don’t know anything about the servants—they are entirely
managed by my housekeeper, Mrs. Ferguson. We are a small family
and we have two footmen here at present.”
“Has Mr. Rowton a valet?” asked Crossley, knitting his brows as he
spoke.
“No, he never will have one. He hates to have people about him
when he is dressing.”
“Some gentlemen are like that,” said Crossley. “It must be the
footman then. There is nothing for it, Mrs. Rowton, but for you to
dismiss one of your servants.”
“I don’t know how that is possible,” answered Nance—“the two
footmen who are here at present grew up in the village, and are, I
believe, much attached to the place.”
“You must make an excuse to get rid of one of them. Watch him
when he commits some slight indiscretion, give him notice, pay him
a month’s wages and a trifle over if you like, and then wire to me.
My man shall come down quickly to take his place.”
“This upsets me terribly,” said Nance. She pressed her hand to her
forehead as she spoke.
“I said there would be crooked work and all kinds of
unpleasantnesses,” said the detective in a dry tone. He rose as he
spoke. “Can you oblige me with fifty pounds on account?” he asked.
“I will go to my room and fetch it,” answered Mrs. Rowton.
She ran upstairs and entered her little boudoir. To her annoyance
she found that her maid, Hester, was standing over her writing table.
The girl had a duster in her hand which she began to use
assiduously when Nancy appeared.
“I want this room—will you leave me?” said her mistress.
“Yes, ma’am, certainly. I was just dusting the ornaments on your
table—I had no time to look after them properly this morning. I am
going now to the conservatories to pick some fresh flowers for these
vases.”
“Thank you. But leave me now,” said Nancy.
Hester slowly left the room. Mrs. Rowton hastily unlocked her
secretary, and taking out her cheque book, filled in a cheque for the
amount which Crossley had demanded, and went downstairs.
The detective took it without a word.
“I have just time to catch my train,” he said, looking at his watch
as he spoke. “I shall expect to hear from you, madam, in a day or
two with regard to the new footman.”
“Yes,” answered Nance. “You shall hear from me.”
The man left the library and a moment later his footsteps might
have been heard crunching the gravel as he walked away.
Hester Winsome, from an upper window, looked after his
retreating form.
“I guess who you are,” she said to herself. “You don’t know all that
I know. Some day perhaps you and I may be friends, there is no
saying. Ah! my young lady, you’re a deep one, but you are not quite
as deep as Hester Winsome yet.”
As Nancy was leaving the library she came suddenly face to face
with Mrs. Ferguson.
“I beg your pardon, madam,” said the housekeeper, “but may I
speak to you for a moment?”
“Certainly,” answered Nance; “is anything the matter?”
“I am ashamed to trouble you, Mrs. Rowton. It is about that
tiresome George—he has just given notice to leave.”
“George,” said Nance with a start, her colour flushing; “I thought
that you liked him.”
“He is an excellent servant, madam, and gives complete
satisfaction; but the fact is, he has taken fright on account of the
new safe. The safe arrived this morning and the men have been
busy putting it up all day. It is a wonderful safe, and they tell me
there is not a burglar in the land who can break into it. It is worth
your while to come and see it, ma’am.”
“So I will presently,” answered Nance; “but tell me now about
George.”
“Well,” said Mrs. Ferguson, “I never knew before that the lad had
nerves; but nerves he has and no mistake. The men called him to
help them move the plate into the safe. It was evidently a surprise
to him to see such a heap of splendid plate, and he came to me
afterwards all white and trembling.
“‘I had no idea there was so much plate in the house,’ he said. ‘It
quite frightens me, and I won’t take the responsibility of living in the
same place with it. I have heard of a place in London that I think will
suit me, and I’d like to go.’”
“Well, let him go,” said Nance.
“To be sure, ma’am. Foolish lad, to leave a first-class place of this
sort because he has got a bit of a scare. What has the plate to do
with him?”
Nance was silent.
“The inconvenience, too,” continued Mrs. Ferguson, knitting her
brows, and speaking with a touch of annoyance; “and just when
Vickers had taken the trouble to train him in. This will put too much
work on Hamley, the under-footman, and he don’t know his work as
well as George. If my master should come back unexpectedly, as he
always does, we’ll not have the place in the apple-pie order that I
should like it to be in. I shall, of course, look out for another servant
immediately.”
“George must go,” said Nance. “There is no use in keeping an
unwilling or frightened servant in the place.”
“Very well, ma’am, of course you are right. I’ll send off a note by
the next post to the registry office in London, where I generally
apply for servants.”
“No, don’t do that,” answered Nance. “It is strange that you
should have spoken to me about George now, for it so happens that
I heard only a few moments ago of an excellent footman. I will write
about him myself at once. When does George want to leave?”
“Really, madam, he is quite unreasonable!”—the housekeeper
laughed as she spoke. “He says the sight of the plate has fairly
shaken his nerves, and he knows he’ll fancy burglars are breaking
into the house every night from this moment forward. I never saw a
sensible lad in such a taking. He wants to forfeit his month’s wages
and get off as soon as possible.”
“Let him go,” answered Mrs. Rowton; “but pay him his wages, of
course. The new footman can arrive to-morrow or the next day at
latest—now I’ll come with you to see the new safe.”
The two women went into the butler’s pantry, where the men from
London were busy adjusting one of Clever’s patent safes. Nancy
looked into it with curiosity. The plate was lying about in all
directions. It made a dazzling and splendid show—silver trays,
baskets, candelabra, table ornaments of every description, coffee-
pots, tea-pots, silver jugs, and valuable silver hunting cups were
lying on the shelves, and even on the floor.
“What a quantity!” exclaimed the young mistress of Rowton
Heights. “Will the safe hold all these?” she asked, turning to one of
the London workmen.
“Oh! yes, madam,” was the reply, “it is one of our very largest.
Yes,” he added, glancing at the silver which lay shining all about
him; “there is scarcely a country house that holds such treasure as
this—to say nothing,” he added, lowering his voice, “of the gold-
plated articles and the jewel case.”
“Will you have the goodness to come forward, madam?” said
another man. “I should like to show you the secret receptacle where
the jewel case will be placed.”
“I think I would rather not,” she said, turning white and
frightened.
“As you please, madam,” said the man in some surprise; “but I
surely understood from Mr. Rowton that you were to be acquainted
with the workings of the safe.”
“Oh! if my husband wished it shown to me, that alters the matter,”
said Nance, the colour returning to her face.
She spent nearly an hour with the men, who explained the
different keys for opening the safe.
CHAPTER XIX.
THE SILVER SCHOOL.
About a month after the events recorded in the last chapter, some
men who went by the name of the Silver School, or Mob, assembled
for an important meeting. The Silver School had existed now for
several years, doing its mysterious work effectually and quietly, and
never exciting suspicion, except in the minds of certain individuals in
New Scotland Yard. They had meeting places all over England, and
not only in England, but also in many parts of the world. They knew
each other by a certain code or cipher; they had their own peculiar
way of shaking hands; their own peculiar nod or smile; they were in
short, a dangerous secret society, their object being to upset
morality and turn the system which makes a man’s property his own
topsy-turvy. Often they met at a lonely public-house; often in the
heart of the busy town; but their favourite place of meeting was in
the house of a private individual near the Chelsea Embankment—the
very place where Rowton had gone to see Long John just before his
mission to Spain.
To-night the members assembled themselves by a roaring fire,
and taking out their pipes awaited the appearance of their leader.
Adrian Rowton, who went by the name of Silver, was in many
respects the leader of the School. He was secretly admired by every
other member; but their real chief, the man whom they feared,
respected, hated, thrilled under, was Piper, or Long John, as they
called him. Piper had none of Rowton’s dare-devil and careless
magnificence of manner. He often appeared rather to slink than to
walk into a room; but there was not a member of the Silver Mob
who did not tremble when he spoke to him, and did not feel elated
for a whole week if the chief gave him even a scant word of praise.

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1) The largest category of mortgages by dollar volume is commercial mortgages.

2) The process of mortgage securitization results in a separation between mortgage origination

4) Federally insured mortgages are called conventional mortgages.

7) Discount points are paid to reduce the down payment required.

12) GNMA role is to provide insurance to pass through mortgage securities.

The refinanced mortgage will be:

Next find the total interest on the 15-year mortgage:

The amount of interest saved is: $230,408.34 − $91,796.29 = $138,612.05.

I. Mortgage companies service more mortgages than they originate.

A) I, III, and IV only

I. GNMA provides timing insurance.

A) I, II, III, and IV are true.

A) I, II, and III are correct.

40) An MBB differs from a CMO or a pass-through in that

A) I, II, and III

I. probably has a higher coupon

A) I, II, and III

I. Higher interest rate risk

A) I, II, and III

48) A Collateralized mortgage obligation (CMO) has:

Answer: Max monthly payment = $1,800 − $3,000/12 − $110 = $1,440

Solve for PV = 233,873.60.

Answer: Max monthly payment = $1,800 − $3,000/12 − $110 = $1,440

Answer: The major buyers are:

57) How does GNMA improve mortgage marketability?

15 year Price Avg Life PSA

True to her promise Lady Georgina arrived at nine o’clock the

“I am leaving England, Nance, for a short time,” wrote her

Crossley heaved a sigh, took his handkerchief out of his pocket,

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