chapter 11

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? Multiple Choice $72.92 $729.17 $875.00 $8,750.00

$72.92

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 Multiple Choice 0.25-0.50% of the loan. 0.75-1.25% of the loan. 1.50-2.25% of the loan. 2.75-3.25% of the loan.

0.75-1.25% of the loan.

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. 25.4% 30.4% 44.4% 53.2%

30.4%

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. Multiple Choice 25.4% 30.4% 44.4% 53.2%

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 Multiple Choice 5%. 16%. 46%. 76%.

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 350. 620. 660. 850.

660

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? -Depository Institutions Deregulation and Monetary Control Act -Financial Institutions Reform, Recovery, and Enforcement Act Correct - Secure and Fair Enforcement for Mortgage Licensing Act -Riegle Community Development and Regulatory Improvement Act

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? -Federal National Mortgage Association (Fannie Mae) -Government National Mortgage Association (Ginnie Mae) Correct - Federal Home Loan Mortgage Corporation (Freddie Mac) - Federal Agricultural Mortgage Corporation (Farmer Mac)

Government National Mortgage Association (Ginnie Mae)

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%. -The lender denies the loan because the LTV ratio is less than 90%. Incorrect -The lender approves the loan because the LTV ratio is greater than 90%. -The lender denies the loan because the LTV ratio is greater than 90%.

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

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"? collateral creditworthiness capacity capability

capacity

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. creditworthiness. capacity. capability.

collateral

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 deregulation. disintermediation. warehousing. underwriting.

disintermediation.

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? prepayment risk fallout risk default risk liquidity risk

fallout risk

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 fallout risk default risk liquidity risk

interest rate risk

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 mortgage fallout. loan servicing. warehousing. loan underwriting.

loan underwriting.

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? Multiple Choice mortgage banker mortgage broker portfolio lender security analyst

mortgage banker

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. mortgage note. mortgage fallout. mortgage term.

mortgage pipeline.

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? traditional direct (portfolio) lending FHA/VA loan securitization conforming conventional loan securitization nonconforming conventional loan securitization

nonconforming conventional loan securitization

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. Correct -the time taken to approve a loan using the automated process is considerably shorter than the case of traditional underwriting. -the success in identifying risky loans is higher using the automated process than is the case with traditional underwriting. -automated underwriting has made home ownership available to households for whom it previously was inaccessible.

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

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 mortgage pipeline. loan servicing. warehousing. loan underwriting.

warehousing