Real Estate: Exam 2

Suppose that you are attempting to value an income-producing property using the direct capitalization approach. Using data from comparable properties, you have determined the overall capitalization rate to be 7.5%. If the projected first-year net operating income (NOI) for the subject property is $135,500, what is the indicated value of the subject using direct capitalization?

$1,806,666.67

Suppose that an appraiser has come to the following conclusions in evaluating the subject property. Due to the dramatic shift in the perceived safety of the neighborhood, values of any residential properties in the area of the subject property have fallen by $10,000, on average. Due to the subject property's age, physical deterioration to the building accounts for an estimate of $50,000 in lost value. An evaluation of the floor plan reveals that it is quite obsolete relative to current homebuyer preferences. This has a detrimental effect on the value of the property that is estimated to be approximately $15,000. Based on your understanding of adjustments related to accrued depreciation, which of the following pertains to the adjustment for external obsolescence?

$10,000

Given the following information, calculate the effective gross income: property: 4 office units, contract rents per unit: $2,500 per month; vacancy and collection losses: 15%; operating expenses: $42,000; capital expenditures: 10%.

$102,000

A comparable property sold 15 months ago for $105,000. If the appropriate adjustment for market conditions is 0.25% per month (without compounding), what would be the adjusted price of the comparable property?

$108,937.50

Suppose that examination of a pro forma reveals that the fifth-year net operating income (NOI) for an income-producing property that you are analyzing is $913,058 (you can assume that this cash flow occurs at the end of the year). If you estimate the projected rental growth rate for the property to be 3% per year, determine the projected sale price of the property at the end of year 5 if the going-out capitalization rate is 8%.

$11,755,622

Suppose you have obtained a 6%, 30-year fully amortizing FHA mortgage loan of $152,625 to finance the purchase of your primary residence. In so doing, you must pay an additional mortgage insurance premium (MIP) of 1.10%. If the first-year average loan balance is $151,775.25, determine the first-year monthly insurance premium payment.

$139.13

Suppose you are interested in taking an FHA mortgage loan for $350,000 in order to purchase your principal residence. In order to do so, you must pay an additional up-front mortgage insurance premium (UFMIP) of 1.0% of the mortgage balance. If the interest rate on the fully amortizing mortgage loan is 6% and the term is 30 years and the UFMIP is financed (i.e., it is included in the loan amount), what is the dollar portion of your monthly mortgage payment that is designated to cover the UFMIP?

$20.98

Assume that a veteran decides to purchase a house for $150,000 using a VA loan that amounts to $44,000. If the buyer were to default on the loan, what is the maximum amount that the VA guarantees the lender?

$22,000

A comparable property sold four months ago for $287,000. If the appropriate adjustment for market conditions is -0.50% per month (without compounding), what would be the adjusted price of the comparable property assuming all else is the same between the two properties?

$281,260.00

Suppose you have just purchased your first home for $300,000. At the time of purchase you could only afford to commit to a down payment of $15,000. In order to make the loan, the lender requires you to obtain private mortgage insurance (PMI) on their behalf. Suppose over time you paid down the principal of the loan to $280,000 and at that point in time you can no longer make any mortgage payments (i.e., you default on the loan). If the lender were to foreclose on your property and sell it for $228,000, what would the lender's loss of principal be taking into consideration the protection of mortgage insurance? (Let's assume that the PMI in this case covers the top 30% of the loan.)

$0

Suppose an institution has purchased a $250,000 mortgage loan from the loan originator and wishes to create a mortgage pass-through security. In doing so, this institution will generate revenue by charging a servicing fee of 35 basis points. If the monthly mortgage payment on the loan is $1,250, how much income is passed through to the investor in the mortgage pass through each month (rounded to the nearest dollar)?

$1,177

Suppose you are interested in obtaining a mortgage loan for $250,000 in order to purchase your principal residence. Your lender has suggested that you might be interested in taking an FHA loan. In order to do so, you must pay an additional up-front mortgage insurance premium (UFMIP) of 1.0% of the mortgage balance. If the interest rate on the fully amortizing mortgage loan is 5% and the term is 30 years, what is your monthly mortgage payment assuming the UFMIP is financed?

$1,355.47

Suppose that an income-producing property is expected to yield cash flows for the owner of $150,000 in each of the next five years, with cash flows being received at the end of each period. If the opportunity cost of investment is 8% annually and the property can be sold for $1,250,000 at the end of the fifth year, determine the value of the property today.

$1,449,635.50

Suppose that examination of a pro forma reveals that the fifth-year net operating income (NOI) for an income-producing property that you are analyzing is $138,446 (you can assume that this cash flow occurs at the end of the year). If you estimate the projected rental growth rate for the property to be 5% per year, determine the projected sale price of the property at the end of year 5 if the going-out capitalization rate is 9%.

$1,615,203.00

Let's assume that we are about to appraise a house using the cost approach. The home was originally constructed in the early 1900s and is one of the last of its kind in this area. The cost of constructing an exact replica of this residence is estimated to be $350,000. On our trip to the actual property, we notice that this is the only residential unit located on this particular road. Based on the current usage of adjacent real estate, we estimate that the property would be worth an additional $25,000 in its highest and best use. However, due to the dramatic shift in the perceived safety of the neighborhood, values of any remaining residential properties in the area have fallen by $20,000. Due to the home's age, we also notice that there has been a significant amount of physical deterioration to the building, amounting to an estimate of $50,000 in lost value. Since the home was built over 100 years ago, the floor plan is quite obsolete relative to current preferences. This has a detrimental effect on the value of the property that is estimated to be approximately $15,000. Given this information, determine the appraised value of the home using the cost approach.

$290,000

Traditional home mortgage underwriting is said to rest on three elements, the "three C's." Recent research (e.g., Archer and Smith, 2011) has confirmed that the underwriting characteristic most strongly associated with default is

collateral

In the securitization process, mortgages are pooled together and cash flows are packaged into securities to be sold in the secondary market. Agencies and private companies that pool mortgages and sell mortgage-backed securities (MBS) are often referred to as

condults

Created by Congress to promote an active secondary market for home mortgages, Fannie Mae and Freddie Mac purchase loans that meet specific underwriting standards such as loan size, documentation, and payment-to-income ratio. The loans that Fannie Mae and Freddie Mac are eligible to purchase are commonly referred to as

conforming conventional loans

Certain mortgage loans contain a due-on-sale clause, which gives the lender the right to terminate the loan at sale of the property. Which of the following types of loans is the most likely to contain a due-on-sale clause?

conventional home loan

Considered the most common type of home loan, which of the following refers to any standard home loan that is not insured or guaranteed by an agency of the U.S. government?

conventional home loan

When a borrower defaults on the payment requirements of a loan, there are several options that the lender has at its disposal. When the lender allows the borrower simply to convey the property to the lender rather than pursue a court-supervised process of terminating all of the borrower's claims of ownership of the property, this is commonly referred to as

deed in lieu of foreclosure

For most mortgage loans on commercial real estate, the right of prepayment is constrained through a prepayment penalty. Which of the following types of prepayment penalties requires a borrower to provide the lender with some combination of U.S. Treasury securities that will serve to replace the cash flows of the loan being paid off?

defeasance prepayment penalty

Assume that an individual has just lost his job and has been consistently late paying his bills. The bank recognizes deterioration in the individual's credit score and has notified him that he must pay his home equity line of credit in full. The mortgage clause that makes this possible is known as the

demand clause

In the early 1970s, home mortgage lenders were predominantly depository institutions. By the end of the decade, the growth of deposits at these institutions became negative due to the emergence of more attractive investment opportunities such as money market funds. This change in the distribution chain of funds is more commonly referred to as

disintermediation

Net operating income is similar to which of the following measures of cash flow in corporate finance?

earnings before deductions for interest, depreciation, income taxes, and amortization (EBIDTA)

Several techniques can be used to obtain an indication of land value. The cost approach to valuation would most likely be used for which of the following properties?

education facility

Even after a property goes into foreclosure, it is still possible for the borrower to reclaim the property as long as he or she produces the outstanding mortgage balance and all foreclosure costs incurred to that point. In a state such as Georgia, this right only extends to the date of the foreclosure sale. When this occurs, this right is more commonly referred to as

equity of redemption

Because the mortgage conveys a complex claim for a long period of time, clauses are included in anticipation of possible future complications. Which of the following clauses requires a borrower to make monthly deposits into an account in order to pay obligations such as property taxes, community association fees, or causality insurance premiums?

escrow clause

Suppose that a mortgage bank locked in an interest rate for a prospective borrower at 8.5%. However, prior to the loan closing, the market mortgage rate falls to 7.5%. In this scenario, the mortgage banker would be most concerned with which of the following risks?

fallout risk

Most real estate loans have a definite term to maturity, stated in years. The majority of home loans will typically have a term to maturity between

fifteen and thirty years

The sequence of adjustments to the transaction price of a comparable property would make no difference if all adjustments were dollar adjustments. However, if percentage adjustments are involved then the sequence does matter. In making adjustments to a comparable property to arrive at a final adjusted sales price, the proper sequence for the following adjustments would be

financing terms, market conditions, location

In contrast to conventional home loans, the interest-only balloon loan requires the borrower to pay off the loan with a balloon payment equal to the original balance after

five to seven years

Accrued depreciation is the difference between the current market value of a building and the total cost to reproduce it new. One reason for this difference is related to changes in tastes, preferences, technical innovations, or market standards. This is commonly referred to as

functional obsolescence

Which of the following types of institutions has historically been the largest purchaser of residential mortgages?

government-sponsored enterprises

For smaller income-producing properties, appraisers may use the ratio of a property's selling price to its effective gross income. This is an example of a

gross income multiplier

Given the following information, calculate the effective gross income multiplier: sale price: $950,000; potential gross income: $250,000; vacancy and collection losses: 15%; and miscellaneous income: $50,000.

3.6

Using the following information, calculate the housing expense ratio: monthly principal and interest on mortgage loan: $635; monthly tax and insurance payments into escrow: $125; gross monthly income: $2,500.

30.4%

Suppose you have just purchased your first home for $300,000. At the time of purchase you could afford to commit 20% of the purchase price to a down payment. Suppose over time you paid down the principal of the loan to $220,000 and at that point in time you can no longer make any mortgage payments (i.e., you default on the loan). If the lender were to foreclose on your property and sell it for $190,000, determine the amount of the loan's principal that the lender was unable to recover due to the default.

$30,000

Suppose you are thinking about purchasing a small office building for $1,500,000. The 30-year fixed-rate mortgage that you have arranged covers 80% of the purchase price and has an interest rate of 8%. Assume you were to default and go into foreclosure in year 10 of this loan. If the lender was able to sell this property for $700,000, how much does the lender stand to lose in the absence of PMI?

$352,696

Suppose that an appraiser has just completed her analysis using the cost approach to valuation. She has determined that the market value of the subject property is $400,000. If the added value of the site was $80,000 and accrued depreciation amounted to $50,000, what was the reproduction cost of the building?

$370,000

Suppose that you are attempting to value an income-producing property using the direct capitalization approach. Using data from comparable properties, you have determined the overall capitalization rate to be 11.44%. If the projected first-year net operating income (NOI) for the subject property is $44,500, what is the indicated value of the subject using direct capitalization?

$388,986.00

Assume you have been hired to appraise a local hospital. Your best estimate of the reproduction (or replacement) cost of the building is $3,700,000. However, upon evaluating the use of land in the local area, you have deemed the value of the site to be worth an additional $800,000. If the building has depreciated by $500,000 over its lifetime and there are no further depreciation losses due to external or functional obsolescence, what is the indicated value of the hospital using the cost approach?

$4,000,000

Considering the following information, what is the NPV if the borrower refinances the loan? Expected holding period: 15 years; current loan balance: $100,000; current loan interest: 7%; current loan mortgage payment: $898.33; remaining term on current mortgage: 15 years; new loan interest: 5.5%; new loan mortgage payment: $817.08; new loan term: 15 years; cost of refinancing: $5,000. Assume that the opportunity cost is the interest rate on the new loan (5.5%).

$4,493.48

Suppose that an appraiser has just completed her analysis using the cost approach to valuation. She has determined that the reproduction cost of the subject property is $370,000. If the added value of the site was $80,000 and accrued depreciation amounted to $50,000, what was the estimated value of the building using the cost approach?

$400,000

Given the following information, calculate the net operating income assuming below-line treatment of capital expenditures: property: 4 office units, contract rents per unit: $2,500 per month; vacancy and collection losses: 15%; operating expenses: $42,000; capital expenditures: 10%.

$60,000

It may be appropriate for a real estate professional to use different approaches for estimating the market value of a property depending upon the particular property type and use. Which of the following approaches would be most applicable when considering the valuation of retail office space (i.e., which approach would receive the most weight in the valuation process)?

income approach

In a fixed-term, level-payment reverse mortgage, sometimes called a reverse annuity mortgage, or RAM, a lender agrees to pay the homeowner a monthly payment, or annuity, and expects to be repaid from the homeowner's equity when he or she sells the home or obtains other financing to pay off the RAM. Consider a household that owns a $150,000 home free and clear of mortgage debt. The RAM lender agrees to a $100,000 RAM for 10 years at 6 percent. Assume payments are made annually, at the beginning of each year to the homeowner. Calculate the annual payment on the RAM.

$7,157.35

Loan servicing includes a number of responsibilities such as collecting monthly mortgage payments from the borrower, remitting principal and interest payments to investors, ensuring sufficient escrow payments are being made by the borrower, and managing default if it should arise. In exchange for these services, mortgage bankers receive a fee. If the outstanding loan balance is $250,000 and the annual servicing fee is 0.35%, what is the monthly fee for servicing the loan?

$72.92

Suppose that an income-producing property is expected to yield cash flows for the owner of $10,000 in each of the next five years, with cash flows being received at the end of each period. If the opportunity cost of investment is 12% annually and the property can be sold for $100,000 at the end of the fifth year, determine the value of the property today.

$92,790.45

Which of the following would be categorized as a cause of external obsolescence?

increased traffic flow due to more intensive use in the local area

At the conclusion of the traditional sales comparison approach to valuation, the appraiser evaluates and reconciles the final adjusted sale prices into a single value for the subject property. This single value is commonly referred to as

indicated value

When the contract rate at closing is less than the current market rate (i.e., interest rates have increased since the time of the loan commitment), the mortgage banker will have to sell the newly originated loan at a discount. This scenario best depicts the mortgage banker's exposure to which of the following risks?

interest rate risk

The refinancing decision is sometimes oversimplified into a few rules of thumb that a borrower uses in order to gauge its potential benefits. Which of the following methodologies is criticized for its inability to account for a variation in refinancing benefits due to cost or holding period differences?

interest rate spread

The going-in cap rate, or overall capitalization rate, is a measure of the relationship between a property's current income stream and its price or value. Which of the following statements regarding cap rates is true?

it is analogous to the dividend yield on a common stock

Analysis of a subject property's pro forma reveals that its fifth-year net operating income (NOI) is projected to be $100,282 (you can assume that this cash flow occurs at the end of the year). If you estimate the projected rental growth rate for the property to be 3% per year and the going-out capitalization rate in year 5 to be 10%, determine the net sale proceeds the current owner of the property would receive if he were to sell the property at the end of year 5 and incur selling expenses that amounted to $58,300.

$974,610.00

Mortgage originators often offer many types and forms of available residential loans as part of their mortgage menu. However, the predominant form of prime conventional mortgage remains the

(fixed-rate) level-payment mortgage (LPM)

Considering the following information, what is the NPV if the borrower refinances the loan? Expected holding period: 3 years; current loan balance: $100,000; current loan interest: 7%; current loan mortgage payment: $898.33; remaining term on current mortgage: 15 years; new loan interest: 5.5%; new loan mortgage payment: $817.08; new loan term: 15 years; cost of refinancing: $5,000. Assume that the opportunity cost is the interest rate on the new loan (5.5%).

-$1,155.27

Suppose that we observe two comparable properties that have each sold twice within the past four years. Property A sold 24 months ago for $500,000 and Property B sold 48 months ago for $575,000. If the two properties were sold today at $425,000 and $465,000, respectively, estimate the change in market conditions (percentage change in price) per month, assuming we equally weight the two properties in our analysis.

-0.51%

It would be hard to overstate the importance of the Federal Housing Administration (FHA) in the history of housing finance. Which of the following instruments created by the FHA is considered the single most important financial instrument in modern housing finance?

level-payment, fully amortizing loan

In using transaction data to determine the current value of the subject property, it is important to recognize that general market conditions may have changed since a particular transaction occurred. Property A sold 18 months ago for $235,000 and Property B sold 12 months ago for $215,000. If the two properties are priced today at $239,500 and $222,300, respectively, what is the average monthly rate of increase that can be used to adjust comparable prices for changes in market conditions?

0.19%

In certain states, such as the state of Florida, the transfer of title to the lender does not occur until the borrower defaults. These states are referred to as

lien theory states

Recently, mortgage banking has become the natural method for doing mortgage lending. Within the mortgage lending process, which of the following roles serves as the primary revenue source for mortgage banks?

loan servicing

Throughout the process of originating and selling mortgages, mortgage companies face a number of risks. Therefore, it is important for a lending institution to evaluate the risks of mortgage loan default through a process commonly referred to as

loan underwriting

In the process of deciding whether to extend a mortgage loan to a prospective borrower, lenders typically examine three elements, more commonly referred to as the "three C's." Which of the following metrics does a bank use to evaluate the collateral piece of the loan agreement?

loan-to-value ratio

Operating expenses can be divided into two categories: variable and fixed expenses. Which of the following best exemplifies a fixed expense?

local property taxes

Suppose that we observe two comparable properties that have each sold twice within the past two years. Property A sold 24 months ago for $350,000 and Property B sold 18 months ago for $325,000. If the two properties were sold today at $375,000 and $340,000, respectively, estimate the change in market conditions (percentage change in price) per month, assuming we equally weight the two properties in our analysis.

0.28%

Suppose that you are in the process of deciding whether or not to refinance your fixed rate mortgage at a lower rate and you are interested in using the payback period rule of thumb to help you in your decision. Your lender has informed you that the cost of refinancing would be $4,300. If your original monthly mortgage payment was $1,250 and your new monthly mortgage payment would be $1,150 after refinancing, determine the payback period.

43 months

In ascertaining whether a borrower has the ability to pay off his loan over time, a mortgage bank may rely on calculating a total debt ratio as part of its underwriting process. Using the following information, calculate the total debt ratio: monthly principal and interest on mortgage loan: $635; monthly tax and insurance payments into escrow: $125; monthly car lease payment (lease term is 3 years): $350; gross monthly income: $2,500.

44.4%

The development of Fannie Mae and Freddie Mac established the framework for a liquid secondary market for residential mortgages. In 2015, the share of all residential mortgage loans owned or securitized by Fannie Mae and Freddie Mac approached approximately

46%

In analyzing a borrower's credit worthiness, the lender will typically examine the borrower's FICO score (a product developed by the Fair Isaac Corporation). High-quality (prime) borrowers are those with a credit score above

660

Given the following information, calculate the effective gross income multiplier: sale price: $2,500,000; effective gross income: $340,000; operating expenses: $100,000; capital expenditures: $36,000.

7.35

A conventional mortgage loan is one that is not insured or guaranteed by an agency of the U.S. government. The lender, however, can still pursue a private mortgage insurance (PMI) policy to provide a guarantee for the fulfillment of the borrower's obligations. Typically PMI is required for all loans that have a loan to value (LTV) ratio greater than

80%

A lender is considering whether to approve a mortgage loan on a home recently appraised at a value of $500,000. If the borrower is willing to make a down payment of $100,000, determine the loan-to-value ratio associated with this property.

80%

Given the following information, calculate the appropriate going-in cap rate using general constant-growth formula: overall market discount rate, 12%; constant growth rate projection: 3% per year; sale price: $1,950,000; net operating income: $390,000; potential gross income: $520,000.

9%

When the mortgage banker originates a home loan, she actually creates two assets: the loan and the servicing rights. When the mortgage bank sells the servicing right to the loan, it historically has had a value of

0.75-1.25% of the loan

FHA mortgage insurance covers any lender loss after conveyance of title of the property to the U.S. Department of Housing and Urban Development (HUD). FHA mortgage insurance requires two premiums to be paid: the UFMIP (up-mortgage insurance premium) and the MIP (monthly insurance premium). Currently, the UFMIP is what percentage of the loan for normal loans used to purchase a personal residence?

1.0%

In addition to the UFMIP (up-front mortgage insurance premium), the owner-occupant borrower who decides to use an FHA mortgage loan will normally pay an additional annual mortgage insurance premium (MIP) that depends on the loan-to-value ratio and the term of the loan. For loans with maturity longer than fifteen years and a loan to value ratio that is greater than 95%, the MIP will be what percentage of the average annual loan balance?

1.15%

Violations of the requirements of a note that do not disrupt the payments on the loan tend to be viewed as technical defaults. In practice, how many days must a payment be overdue in order for lenders to treat a default as serious (i.e., a substantive default)?

90 days

When a mortgage is used as collateral for the issuance of a mortgage-backed security (MBS), the underlying mortgage is said to be securitized. Approximately what percentage of conventional conforming and FHA or VA loans in the United States are being sold into the secondary market and being used as collateral for the issuance of MBS?

90%

When employing the sales comparison approach, appraisers must consider numerous adjustments to convert each comparable sale transaction into an approximation of the subject property. Adjustments are divided into two groups: transactional adjustments and property adjustments. All of the following are transactional adjustments except

locational

The ability of homeowners to prepay the principal on their outstanding mortgage balance creates cash flow uncertainty for the lender. As a result, the lender may wish to prohibit prepayment on a mortgage loan for a specified period of time after its origination. This is accomplished through which of the following?

lockout provision

Lenders generally require private mortgage insurance (PMI) for conventional loans over 80% of the value of the security property. PMI protects a lender against which of the following?

losses due to default on the loan

Since conforming loans can be much more readily bought and sold in the secondary mortgage market, they carry a(n) _______ interest rate than comparable nonconforming loans.

lower

Estimating the market value of real estate is complicated by the unique characteristics of real estate markets. In contrast to stock markets, real estate markets are characterized by all of the following except

market prices are revealed almost instantaneously to prospective buyers

To put into perspective the amount of residential mortgage debt outstanding, it is useful to compare this market to other prominent sources of available debt. Listing the issuer with the largest amount of debt outstanding first, which of the following choices best depicts the relative rank ordering among the major sources of outstanding debt in the United States as of the end of 2015?

marketable U.S. government bonds, residential mortgage debt, corporate bonds, consumer credit

In real estate markets, a transaction occurs only when the investment value of the buyer exceeds the investment value of the seller. The buyer's investment value is the ________ that he or she would be willing to pay for a particular property, while the seller's investment value is the _______ that he or she would be willing to accept.

maximum; minimum

A special contract in which the borrower pledges the mortgaged property as security to the lender is commonly referred to as the

mortgage (deed of trust)

The emergence of mortgage securities propelled the development of mortgage companies, an entity significantly different from the thrifts and banks that previously dominated the mortgage landscape. Which of the following parties is responsible for providing mortgage origination services and initial funding within this new framework?

mortgage banker

With the arrival of subprime mortgages in recent years, a new kind of trigger event became apparent in leading households to default. Which of the following trigger events is primarily associated with most defaults that have occurred during the most recent subprime mortgage crisis?

mortgage payment spikes

When calculating the net operating income of a property, it is important to identify any expenses that will be incurred in attempts to maintain the property. All of the following would be considered operating expenses except

mortgage payments

Mortgage banks typically will attempt to sell loans as quickly as possible after they are originated by either issuing mortgage securities or selling the loan to an intermediary that will subsequently sell the loan in the secondary market. The period between loan commitment and loan sale is referred to as the

mortgage pipeline

In a mortgage agreement, the borrower conveys to the lender a security interest in the mortgage property. The lender, i.e., the individual who receives the mortgage claim, is known as the

mortgagee

Standard mortgage loans require monthly payments typically composed of two components: interest and principal repayments. When scheduled mortgage payments are insufficient to pay all of the accumulating interest, causing some interest to be added to the outstanding balance after each payment shortfall, the loan is said to be

negatively amortizing

Which of the following measures is considered the fundamental determinant of market value for income-producing properties?

net operating income

As part of the data analysis step in the appraisal process, it is necessary to consider the highest and best use of the property in question. In regards to determining highest and best use, all of the following statements are true except

no financial limits are considered when determining the property's best use.

In the modern framework of home mortgage lending, there are four channels by which first mortgage home loans are created. Within which of the following channels would you typically find a Wall Street investment bank obtaining loans, pooling loans, and creating a senior-subordinate security structure?

nonconforming conventional loan securitization

Suppose a homeowner is reluctant to refinance until he is reasonably sure that interest rates are not going to fall appreciably from where they currently are. In this case, the homeowner appears to be concerned about which of the following costs associated with refinancing?

opportunity cost

Mortgage loans that allow the borrower to switch among a variety of payment arrangements throughout the life of the loan are more commonly referred to as

option ARM loans

In recent years, mortgage lenders responded to the demand from home buyers who were unable to put 20% down on their purchase and were looking to avoid the private mortgage insurance (PMI) requirement that would typically accompany such a loan by developing a second mortgage that is created simultaneously with the first mortgage in an amount of 10% of the value of the home. This enabled the borrower to obtain 90% financing while avoiding the additional cost of PMI. These loans are more commonly referred to as

piggyback mortgage loans

The starting point in calculating net operating income is the total annual income the property would produce assuming 100% occupancy and no collection losses. This is commonly referred to as

potential gross income

The loan origination market, in which borrowers and lenders come together to provide adequate financing for the purchase of a property, is more commonly referred to as the

primary mortgage market

When using discounted cash flow analysis for valuation, an appraiser will prepare a cash flow forecast, often referred to as a

pro forma

The cap rate is an important metric that investors use to analyze the state of commercial real estate markets. When interpreting cap rate movements, an increase in cap rates over time would indicate that

property values have decreased

Suppose a buyer agrees to purchase a tract of land for $40,000. The buyer is only able to obtain a mortgage for $32,000. Rather than let the deal fall through, the seller agrees to accept $4,000 in cash and a note from the buyer for the remaining $4,000. This type of transaction is commonly referred to as a

purchase money mortgage

When a buyer acquires a property having an existing mortgage loan, a decision must be made as to whether or not the subsequent owner of the property can preserve the loan. If the buyer does not add his or her signature to the note, the buyer does not take on any personal liability. In this case, the buyer is said to

purchase the property subject to the existing loan

Based on your understanding of the risks associated with different mortgage loan types, which of the following mortgage loans would be considered the safest with respect to default risk?

qualified mortgage loans

The Dodd-Frank Wall Street Reform and Consumer Protection Act created an important new class of home mortgages that is aimed at helping mortgage lenders implement an "ability to repay" standard imposed by the law. These mortgages are more commonly referred to as

qualified mortgage loans

With most standard home loans, the lender can hold the borrower personally liable in the event of a default. Such loans are commonly referred to as

recourse loans

In addition to numerous congressional acts that focus more on national regulation, laws have been created that affect the practice of home mortgage lending at a community or neighborhood level. For example, laws have been enacted to prevent lenders from avoiding certain neighborhoods without regard to the merits of the individual loan applications, a practice more commonly referred to as

redlining

The cost approach to valuation assumes the market value of a new building is similar to the cost of constructing it today. Which of the following terms refers to the expenditure required to construct a building of equal utility using modern construction techniques, materials, and design that eliminates outdated aspects of the structure?

replacement cost

Total mortgage debt outstanding as of the third quarter of 2015 approached $13.7 trillion. Which of the following types of mortgage loans accounts for the greatest percentage of mortgage debt outstanding?

residential (1-4 family)

Many older, retired households are considered "house poor." Which of the following forms of loans has been designed to help mitigate this problem by offering additional monthly income to these homeowners in exchange for a portion of their housing equity?

reverse mortgage

Which of these is most likely to be regarded as a capital expenditure rather than an operating expense?

roof replacement

While there are several conventional approaches used to estimate the market value of real estate, which of the following is typically considered the most reliable approach?

sales comparison approach

If all appraisal methods are appropriate for use in valuing a particular property, there is a clear order of preference that real estate professionals adhere to. Which of the following depicts the preferred order, with the most preferable approach being listed first and the least preferable listed last?

sales comparison approach, income approach, cost approach

Mortgage originators can either hold loans in their portfolios or sell them to investors. When a mortgage originator decides to sell mortgages to another institution, this transaction occurs in what is commonly referred to as the

secondary mortgage market

When a borrower defaults on a mortgage loan, his or her credit record will be adversely affected. While borrowers can recover from this reduction in their credit score, if a default goes into the borrower's records it will remain for

seven years

In recent years, home equity loans have become a popular form of second mortgage. Their popularity has been a result of all of the following except

shorter terms than other consumer debt

Even after a property goes into foreclosure, it is still possible for the borrower to reclaim the property as long as he or she produces the outstanding mortgage balance and all foreclosure costs incurred to that point. In a state such as Florida, this right may even extend beyond the date of the foreclosure sale. When this occurs, this right is more commonly referred to as

statutory redemption

When a borrower decides to stop making payments on an existing mortgage loan despite having the ability to make payments (typically when the home has lost value), this is more commonly referred to as a(n)

strategic default

Despite many innovations in the lending process that made mortgage loans more accessible and affordable to the general public, many potential borrowers faced considerable barriers in qualifying for a loan and making a down payment. Which of the following types of loans was designed for a borrower with weak credit, those who seek 100% financing, or who cannot document their income?

subprime mortgage loan

Most appraisers would say that report writing is one of the most important functions that they perform. Assume that an appraiser is putting together a report for a single-family home. Which of the following reporting options would be the most commonly used in this scenario?

summary appraisal report

Most adjustable rate mortgage (ARM) loans have been marketed with a temporarily reduced interest rate commonly referred to as a

teaser rate

When using discounted cash flow analysis for valuation, the appraiser must estimate the sale price at the end of the expected holding period. This price (assuming selling expenses have yet to be accounted for) is referred to as the property's

terminal value

The risk of bankruptcy tends to travel with the risk of foreclosure since both can result from financial distress. Known popularly by its section in the Federal Bankruptcy Code, which of the following types of bankruptcy is a court-supervised workout for a troubled business?

Chapter 11 bankruptcy

Known popularly by its section in the Federal Bankruptcy Code, which of the following types of bankruptcy is a court-supervised workout for a troubled household?

Chapter 13 bankruptcy

Based on your understanding of the relation between the various types of bankruptcy and the foreclosure process, which of the following types of bankruptcy would you expect to be least harmful to a lender's mortgage interest?

Chapter 7 bankruptcy

Known popularly by its section in the Federal Bankruptcy Code, which of the following types of bankruptcy is the traditional form of bankruptcy wherein the court simply liquidates the assets of the debtor and distributes the proceeds to creditors in proportion to their share of total claims?

Chapter 7 bankruptcy

In an attempt to regulate home mortgage lending after the mortgage crisis of 2007, which of the following acts created an independent oversight agency tasked with the responsibility of overseeing and enforcing federal consumer financial protection laws; enforcing antidiscrimination laws in consumer finance; restricting unfair, deceptive, or abusive acts or practices; receiving consumer complaints; promoting financial education; and watching for emerging financial risks for consumers?

Dodd-Frank Wall Street Reform and Consumer Protection Act

Which of the following acts prohibits discrimination in lending practices on the basis of race, color, religion, national origin, sex, marital status, age, or because all or part of an applicant's income derives from a public assistance program?

Equal Credit Opportunity Act (ECOA)

Federal Housing Administration (FHA) loans differ from conventional loans in a number of ways. All of the following statements regarding FHA loans are true except

FHA loans require higher credit scores than are needed for prime conventional loans

The Federal National Mortgage Association (Fannie Mae) was originally established to provide a secondary market for FHA-insured and VA-guaranteed loans. All of the following statements regarding Fannie Mae are true except

Fannie Mae lends money directly to homebuyers

In 1989, Congress took major steps to establish depository institution accountability by requiring these institutions to hold more capital as they take on riskier assets. Which of the following congressional acts imposed these capital standards on depository institutions?

Financial Institutions Reform, Recovery, and Enforcement Act

In the late 1960s, Congress created a number of agencies designed to address a struggling secondary market for residential mortgages. Which of the following organizations was developed primarily to guarantee mortgage-backed securities based on pools of FHA, VA, and Rural Housing Service loans, rather than issue, buy, or sell mortgages?

Government National Mortgage Association (Ginnie Mae)

Which of the following acts was passed out of concern for abusive predatory practices in subprime lending?

Home Ownership and Equity Protection Act (HOEPA)

Real estate appraisers generally distinguish among the concepts of market value, investment value, and transaction value. Which of the following statements best describes the concept of market value?

It is an estimate of the most probable selling price of a property in a competitive market

A significant number of mortgage loans use adjustable interest rates, in which the interest rate of the loan is tied to an index rate that fluctuates over time. For income-producing property, the most common index rate is the

London Interbank Offered Rate (LIBOR)

The difference between judicial foreclosure and power of sale in the treatment of defaulted mortgages can be significant. All of the following statements regarding power of sale are true except A) it is less costly for power of sale to be employed than judicial foreclosure B) typically, lenders must give proper legal notice to the borrower, advertise the sale property, and allow a required passage of time before sale. C) the power of sale treatment is faster than judicial foreclosure D) the foreclosed property is typically sold through a public auction administered by the court.

the foreclosed property is typically sold through a public auction administered by the court

The Federal Housing Administration (FHA) insures loans made by private lenders that meet FHA's property and credit-risk standards. Which of the following statements concerning FHA insurance is true?

the insurance is paid by the borrower and protects the lender against loss due to borrower default

One complication that appraisers may face is the variety of lease types that may be available for a particular property type. Which of the following statements best describes a graduated or step-up lease?

the lease establishes a schedule of rental rate increases over the term of the lease

Let's suppose that a lender has established a 90% loan-to-value ratio cutoff as one of its primary underwriting criteria. If a borrower is willing to make a down payment of $125,000 on a home recently appraised at $550,000, which of the following best describes the lender's decision on whether or not to approve the loan along this dimension?

the lender approves the loan because the LTV ratio is less than 90%

A common criticism of the annual percentage rate (APR) is that it usually understates the true cost of borrowing. The APR may understate the cost of borrowing because it assumes

the loan always goes to maturity

To be considered a qualified mortgage, the loan must have specific features and meet designated underwriting requirements. Based on your understanding of what constitutes a qualified mortgage, all of the following features describe a qualified mortgage except

the loan does not require verification of underwriting information from third-party records

The traditional approach to loan underwriting has virtually been replaced by an automated underwriting process that involves a statistically derived equation to determine the level of default risk associated with a loan application. All of the following statements regarding the automated underwriting process are true except

the marginal cost per loan underwritten using the automated process is greater than the case of traditional underwriting

Adjustments for physical characteristics are intended to capture the dimensions in which a comparable property differs physically from the subject property. If the only physical difference between the subject property and the comparable is that the comparable does not have a fireplace, which of the following adjustments should take place?

the transaction price of the comparable property should be adjusted upward

While there is no specific number of comparables that is required for every appraisal assignment, how many comparable sales are considered adequate as long as the properties are very similar to the subject property?

three

The distinction between market rent and contract rent is important due to differences in lease terms. Office, retail, and industrial tenants most commonly occupy their space under leases that run

three to five years

Given the following information, calculate the appropriate going-in cap rate using mortgage-equity rate analysis; mortgage financing, 75%; typical debt financing cap rate: 10%; sale price: $1,950,000; before tax cash flow (BTCF): $390,000.

12.5%

In certain states, such as the state of Georgia, there is a temporary transfer of title to the lender at the time the mortgage loan is made. The borrower then would obtain the rights to the title once the loan has been repaid. These states are referred to as

title theory states

Given the following information, calculate the overall capitalization rate: sale price: $950,000; potential gross income: $250,000; vacancy and collection losses: $50,000; and operating expenses: $50,000.

15.8%

Added to the index of the adjustable rate is a margin, which is the lender's markup. For standard adjustable rate mortgage (ARM) loans, the average industry margin has been stable at approximately

275 basis points

It is possible to have a secured real estate loan without a mortgage through the use of a contract for deed. In contrast to the standard real estate sale, which of the following events occurs after the closing when dealing with a contract for deed?

title to the property passes to the buyer

The hybrid ARM attempts to balance the fixed payment desire of a borrower with the lender's desire to increase interest rates if market rates rise in the future. In its most common form, known as a 2-28, the hybrid ARM will have a fixed-interest rate for

two years

The process of converting periodic income into a value estimate is referred to as income capitalization. Income capitalization models can generally be categorized as either direct capitalization models or discounted cash flow models. Which of the following statements best describes the direct capitalization method?

value estimates are based on a multiple of expected first-year net operating income

In addition to providing home mortgages, large commercial banks have specialized in providing short-term funds to mortgage banking companies in order to enable them to originate mortgage loans and hold the loans until the mortgage banking company can sell them in the secondary market. This type of financing is commonly referred to as

warehousing

Foreclosure is considered the ultimate recourse of the lender because it allows the lender to bring about sale of the property to recover the outstanding indebtedness. All of the following statements regarding foreclosure are true except

when a lender forecloses on a property, it extinguishes all superior liens, bringing about a free and clear sale of the property

Favorable mortgage financing may have a significant impact on the transaction price of the particular property. If the comparable property was known to have had favorable financing terms negotiated into the transaction price, which of the following adjustments should take place? (Note: Assume that the comparable property cannot be dropped from the analysis as there are already limited comparable sales transactions.)

The transaction price of the comparable property should be adjusted downward.

Congress has enacted a number of regulations that have established criteria for evaluating home loan applicants and mandating disclosures in the origination of home loans. Which of the following congressional acts requires important disclosures concerning the cost of consumer credit, including the computation of the annual percentage rate (APR)?

Truth-in-Lending Act (TILA)

Real estate professionals have long supported strict standards of ethics and practice. Followed by all states and federal regulatory agencies, which of the following imposes ethical obligations and minimum standards that must be followed by all real estate professionals providing formal estimates of market value?

Uniform Standards of Professional Appraisal Practice (USPAP)

Mortgage insurance rates vary with the perceived riskiness of the loan. Which of the following scenarios would result in a higher mortgage insurance premium?

a "cash-out" refinancing loan

If a homeowner in mortgage distress owes more than the value of the home and is unable to make the loan manageable by refinancing or modifying the mortgage, the next recourse often is a short sale of the property. All of the following statements are true regarding a short sale except

a short sale relieves the seller of any other outstanding obligations on the home, such as owner association fees or a second mortgage

The Dodd-Frank Act ushered in a new standard for home mortgage underwriting. Which of the following standards is now required of any lender when underwriting a home loan?

ability-to-repay standard

Mortgage loans made to borrowers with normal credit quality but lacking the necessary documentation of their financial circumstances typically needed to meet conforming mortgage standards would most likely be considered

alt-A loans

In a mortgage loan, the borrower always creates two documents: a note and a mortgage. Which of the following pieces of information is provided in the mortgage?

an unambiguous description of the property that is being pledged as collateral for the loan

Since mortgages typically have multiple costs associated with them, a borrower may attempt to reduce these costs into a single measure in order to compare two or more mortgages. Which of the following measures is a popular tool for comparing the cost of several mortgages?

annual percentage rate

Gross income multiplier analysis assumes that the subject and comparable properties are collecting market rents. Therefore, it is frequently argued that an income multiplier approach to valuation is most appropriate for properties with short-term leases. For which of the following property types, therefore, would we find it most appealing to use a gross-income multiplier in our analysis?

apartments

While it is often sufficient to rely on informal methods of estimating the market value of real estate assets, the complexity and large dollar value of many real estate decisions dictate that formal estimates based on methodical collection and analysis of relevant market data should be utilized. The unbiased written estimate of the market value of a property is commonly referred to as a(n)

appraisal

Real estate appraisal is often considered "more art than science," since identifying truly comparable properties is a subjective process. Therefore, it is essential that a comparable property transaction at least meets the requirement that it was fairly negotiated under typical market conditions. Which of the following types of transactions would be most appropriate for use in the sales comparison approach to valuation?

arm's-length transactions

In calculating net operating income, vacancy losses must be subtracted from the gross income collected. The normal range for vacancy and collection losses for apartment, office, and retail properties is

between 5% and 15%

Traditional home mortgage underwriting is said to rest on three elements, the "three C's." The housing expense ratio is one tool that lenders will use to address concerns associated with which of the "three C's"?

capacity

The expected costs to make replacements, alterations, or improvements to a building that materially prolong its life and increase its value is referred to as

capital expenditures

Most appraisers adhere to an "above-line" treatment of capital expenditures. This implies which of the following?

capital expenditures are subtracted in the calculation of net operating income