Terms Used in the Mortgage Industry

The term "escrow analysis" refers to: A. The calculation used to determine how much can be held in an escrow account B. The calculation used to determine whether or not a mortgage qualifies as a high-cost loan under section 32 C. The process used to reconcile differences in comparables on an appraisal D. The process used to determine whether or not a Loan Estimate is within tolerance levels

A. The calculation used to determine how much can be held in an escrow account An escrow analysis is the accounting method used to determine the adequacy of the funds held in an escrow account. The loan servicer must use an aggregate escrow analysis accounting method in making that determination.

Service release premiums (SRP) compensate: A. A borrower for obtaining a loan B. A lender for the transfer of servicing rights C. A broker for closing a loan above par D. A title company for issuing title insurance

B. A lender for the transfer of servicing rights The service release premium (SRP) compensates the lender for the transfer of servicing rights to the entity purchasing the loan paper. A lender selling the whole loan and servicing rights may receive an SRP based on the purchaser's value of the opportunity to collect payments, hold escrow ,and otherwise realize servicing income.

If a conventional loan goes into default, is foreclosed upon, and causes the lender to lose money, which of the following would possibly reimburse the lender for the loss? A. Mortgage insurance company B. FHA C. Fannie Mae D. Hazard insurance company

A. Mortgage insurance company If a conventional loan goes into default and is foreclosed upon and the loan was covered by mortgage insurance, that insurance would reimburse the lender for some or all of its loss.

Finance charges which are paid separately before or at the time of closing are considered to be: A. Prepaid finance charges B. P.O.C. charges C. Third-party fees D. Periodic interest charges

A. Prepaid finance charges A prepaid finance charge is any finance charge paid separately, in cash or by check, before or at consummation of the transaction or withheld from the proceeds of the loan at any time. It is a direct loan charge paid by the borrower and is included in the calculation of the annual percentage rate.

The acronym COFI can best be described as: A. A popular fixed-rate, low-interest mortgage product B. A popular index used for adjustable-rate mortgages C. A popular margin used for adjustable-rate mortgages D. A popular start rate used for adjustable-rate mortgages

B. A popular index used for adjustable-rate mortgages "COFI" stands for "Cost of Funds Index," a popular index used when setting the interest rate on some adjustable-rate mortgages.

Which of the following would not be covered by a lender's title policy? A. Boundary dispute B. CC and R issues C. Recorded liens D. Recorded encumbrances

B. CC and R issues CC and R issues are not covered under a lender's title policy. A lender's title policy covers boundary disputes and issues with recorded liens and encumbrances.

Which of the following occurs in the secondary mortgage market? A. Mortgage brokers negotiating a loan for a borrower B. Fannie Mae pooling loans for sale on the securities market C. Borrowers applying for a loan D. A mortgage banker referring service providers

B. Fannie Mae pooling loans for sale on the securities market After a loan, a lender can hold it, bearing the risks itself; warehouse it, using it as collateral for loans the lender needs from other lenders; sell it to another lender or investor; or use it to back securities sold to investors. These activities occur on the secondary mortgage market. When Fannie Mae pools mortgage loans for sale as mortgage-backed securities, it is engaging in business on the secondary mortgage market.

Prepaid finance charges are defined as which of the following? A. Closing costs paid by the borrower at closing B. Finance charges that are paid separately before, at the time of consummation, or withheld from the loan proceeds C. Finance charges which are paid to third parties as part of a residential mortgage transaction at the time of closing D. Finance charges which are paid outside of closing and are not included on the settlement statement or in APR calculations

B. Finance charges that are paid separately before, at the time of consummation, or withheld from the loan proceeds A prepaid finance charge is any finance charge paid separately before or at consummation of a transation or withheld from the proceeds of the loan at any time. They are direct loan charges paid by the borrower and must be included in the calculation of the annual percentage rate.

In a residential mortgage loan transaction, where is any yield spread premium disclosed? A. In the Loan Estimate only B. In both the Loan Estimate and the Closing Disclosure C. In the Closing Disclosure only D. In any promissory note

B. In both the Loan Estimate and the Closing Disclosure Yield spread premiums (YSPs) are points credited for an interest rate above the par rate. No-closing cost loans result from applying the YSP to pay the borrower's closing costs so that they need not be paid up front. Any YSP paid must be disclosed on both the Loan Estimate and the Closing Disclosure as a lender credit. A creditor may also include any excess charge by it as a lender credit.

Which of the following lists contains terms which are all included in APR calculations? A. Origination fee, appraisal fee, flood certification fee, and processing fee B. Origination fee, per-diem interest, tax service fee, and discount points C. Buydown fee, credit report fee, UFMIP, and closing fee D. Title insurance fee, processing fee, warehouse fee, and lender courier fee

B. Origination fee, per-diem interest, tax service fee, and discount points Each of the following is included in the calculation of the annual percentage rate: the origination fee, per-diem interest, tax service fee, and discount points. Other items which may be included in the calculation of the APR include mortgage broker fees, credit insurance premuims (in certain cases), and fees charged by a third-party settlement service provider if the lender requires the particular services or keeps a portion of the charge.

Subordinate financing relates to: A. Seller financing B. Second mortgages C. Financing in the secondary mortgage market D. Subprime loans

B. Second mortgages Subordinate financing relates to the making of a loan that is secondary to one or more other loans on the property. A mortgage is a second mortgage when it is recorded after another mortgage that is still outstanding on the same property, or it has a subordination clause specifying that it has lower priority or will remain subordinate in the event that the first mortgage is refinanced.

The term "amortize" refers to which of the following? A. How often an interest rate may adjust B. The spreading of principal and interest payments over a certain period of time C. Factoring closing costs into the effective interest rate D. Factoring in a prepayment penalty into the effective interest rate

B. The spreading of principal and interest payments over a certain period of time Amortization is the process of paying off a loan, both principal and interest, by gradually reducing the balance through a series of installment payments. A fully-amortizing mortgage provides for periodic payments that repay the loan in its entirety by the end of the mortgage term.

A standard owner's title policy would cover all of the following, except: A. Boundary disputes B. Unfiled mechanic's liens C. Previous owner's mortgage D. Previous owner's judgment lien

B. Unfiled mechanic's liens An owner's title insurance policy covers boundary disputes and the previous owner's judgment liens and/or mortgage. It would not generally cover unfiled mechanic's liens; this is typically negotiated into the policy or added in an enhanced policy, rather than a standard one.

Which of the following statements most accurately describes Freddie Mac? A. A government agency which was created to facilitate home ownership through the offering of conventional loan programs for middle-income families B. A privately-held corporation with no government affiliation which lends money for conventional mortgages C. A publicly-traded private entity which is government sponsored and was created in order to facilitate home ownership D. A government agency which was created in order to facilitate home ownership, especially for lower-income families, through the offering of FHA and other government programs

C. A publicly-traded private entity which is government sponsored and was created in order to facilitate home ownership Freddie Mac and Fannie Mae are government-sponsored enterprises which engage in business on the secondary mortgage market, buying conforming conventional loans, FHA-insured loans, and VA- and USDA-guaranteed loans. Their purchase of such loans provides income to lenders, reducing the need for lenders to hold substantial funds for mortgage loans.

Which of the following incorporates closing costs associated with the loan into the interest rate for comparison and disclosure purposes? A. Good Faith Estimate B. Regulation X C. APR D. RESPA

C. APR The annual percentage rate (APR) is the relationship of the total finance charge to the total amount financed, stated as a yearly rate. It includes all finance charges, not just interest, and thus is a good measure for the true cost of a specific mortgage loan product.

A mortgage lender closes a mortgage in their own name, funding the loan through a warehouse line. The lender does not act as a servicer, but sells the servicing rights along with the mortgage asset. When the lender sells the servicing rights in the secondary market, they receive compensation from the purchasing entity. Which of the following terms best describes this compensation? A. Yield spread premium (YSP) B. Back-end pricing C. Service release premium (SRP) D. Premium pricing

C. Service release premium (SRP) If the loan is sold on the secondary market, the purchaser will likely pay a premium (or take a discount) for the spread between the interest rate in the loan and the par interest rate. It is based on the loan size and note interest rate. If a loan closed at 5.5% and the par rate to purchasers was 5.25%, the purchaser may have to pay one point to cover the 0.25% difference in the rates. This premium or discount is not disclosed in the Closing Disclosure and therefore does not affect the borrower, because the sale of the loan in the secondary market occurs after closing. A lender selling the loan and servicing rights may also receive a premium based on the purchaser's value of the opportunity to collect payments, hold escrow, and otherwise realize servicing income. This is called the service release premium.

The term "subordination" refers to: A. The process of releasing a lien B. The process of recording a lien C. The process of one lien holder accepting inferior lien priority in favor of another D. The process of researching a lien

C. The process of one lien holder accepting inferior lien priority in favor of another Subordination is the process of one lienholder accepting inferior lien priority in favor of another. In general, a second mortgage provides for a subordination clause, specifying that it has lower priority (i.e., is subordinate) than the first lien.

Yield spread premiums (YSP) compensate: A. A borrower for obtaining a loan B. A lender for the transfer of servicing rights C. A title company for issuing title insurance D. A borrower for closing a loan above par

D. A borrower for closing a loan above par The yield spread premium compensates a borrower for closing a loan at an interest rate above the par rate. The par rate is the interest rate that would be charged without any yield spread premiums to increase it or discount points to decrease it. Yield spread premiums are now more commonly called "borrower credits."

Aggregate escrow analysis can best be described as: A. The statistical method used by the federal government to analyze data received under HMDA to determine whether or not certain lenders are illegally discriminating B. An appraisal method which uses comparable sales from similar properties; differences in the properties are accounted for through separate adjustments, which are then aggregated to determine a value C. An analysis required by the FCRA which requires credit reporting agencies to verify the accuracy of credit scores D. A formula which is used to determine whether or not servicers are holding too much money in a borrower's escrow or reserve accounts

D. A formula which is used to determine whether or not servicers are holding too much money in a borrower's escrow or reserve accounts An aggregate escrow analysis is an accounting method used to compute the adequacy of escrow account funds held by a lender for the payment of mortgage-related expenses on behalf of the borrower.

Which of the following best describes amortization? A. Paying insufficient principal and interest monthly to pay off the loan at the end of the loan term B. Failing to pay the interest due each month on a loan C. Paying only the interest due on a loan each month D. Paying enough principal and interest monthly to pay off the loan by the end of the loan term

D. Paying enough principal and interest monthly to pay off the loan by the end of the loan term Amortization is the process of paying off a loan, both principal and interest, by gradually reducing the balance through a series of installment payments. A fully-amortizing mortgage provides for periodic payments that repay the loan in its entirety by the end of the mortgage term.