Ch.10

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).

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

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?

0.85%

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 (0.011/12)*151,775.25

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

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

5-7 years

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?

Amount of mortgage = 80%*1.5m = 1.2m Interest = 8%/12 Term = 30 years 1.2m = PMT/(8%/12)*(1-(1+(8%/12))^360) PMT = 8,805.17 Since loan has been paid for 10 years, we need to determine the amount of loan outstanding at the end of year 10. Amount of loan outstanding at the end of year 10 will be the present value of remaining payments i.e. PV of monthly payments for 240 months Loan outstanding at the end of year 10 = $8805.17 * ((1-(1+(8%/12))^-240)/(8%/12)) = $1,052,696 Amount recovered from sale of Property = $700,000 Hence amount of loss = amount not recovered = Loan outstanding at the end of year 10 - amount recovered from sale of property = $1,052,696 - $700,000 = $352,696

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.

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?

PV of loan is (250+(250*0.01)) = 252.50 Excel: PMT(5%/12,30*12,-252500 Pmt = 1,355.47

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.

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

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

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

government sponsored enterprises

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

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

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

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

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

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