SETUP: Three hundred households receive mortgage loans from Titan Bank to buy homes. The buyers have an annual gross income of $60,000 and borrow $120,000 on a 30-year fixed rate loan of 4.8 percent. The annual real estate taxes and annual homeowner insurance premiums are $2,800 and $900, respectively. Titan Bank sells the loans to Fannie Mae who then creates mortgage backed securities, known as mortgage pass through securities. Packer Bank buys the mortgage pass through securities and holds them in their investment portfolio.

13a. What participant(s) in the setup above holds the interest rate risk associated with mortgage loans? Explain your answer.

13b. What participant(s) in the setup above holds the prepayment risk associated with mortgage loans? Explain your answer.

13c. What participant(s) in the setup holds the default risk associated with mortgage loans? Explain your answer.