FIN 351 Chapter 10

38. 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) A. $0 B. $52,000 C. $57,000 D. $72,000

A. $0

41. 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. A. $139.13 B. $1,025.69 C. $1,669.53 D. $1,678.88

A. $139.13

40. 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? A. $20.98 B. $291.67 C. $2,119.41 D. $3,500.00

A. $20.98

37. 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. A. $30,000 B. $50,000 C. $240,000 D. $300,000

A. $30,000

42. 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. A. $7,157.35 B. $7,586.80 C. $12,817.73 D. $13,586.80

A. $7,157.35

6. 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: A. (fixed-rate) level payment mortgage (LPM) B. adjustable rate mortgage (ARM) C. subprime mortgage D. alt-A mortgage

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

26. 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? A. 1.0% B. 1.5% C. 2.0% D. 4.0%

A. 1.0%

3. 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? A. Conventional home loan B. Federal Housing Administration loan C. Veterans Affairs loan D. Section 203 loan

A. Conventional home loan

11. 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? A. Level-payment, fully amortizing loan B. Adjustable rate mortgage C. Partially-amortizing balloon loan D. Subprime mortgage loan

A. Level-payment, fully amortizing loan

7. Lenders generally require private mortgage insurance (PMI) for conventional loans over 80 percent of the value of the security property. PMI protects a lender against which of the following? A. Losses due to default on the loan B. Legal threat to the lender's mortgage claim C. Stoppage of mortgage payment after the death of the insured borrower D. Changes in the index rate associated with an adjustable rate mortgage

A. Losses due to default on the loan

22. 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? A. Opportunity cost B. Tax consequences C. Default risk D. Upfront fees

A. Opportunity cost

29. 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: A. primary mortgage market B. secondary mortgage market C. over-the-counter market D. government sponsored market

A. primary mortgage market

39. 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? A. $1,342.05 B. $1,355.47 C. $1,498.88 D. $2,500

B. $1,355.47

33. 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 defaults on the loan, what is the maximum amount that the VA guarantees the lender? A. $11,000 B. $22,000 C. $33,000 D. $44,000

B. $22,000

35. 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%). A. -$5,000.00 B. -$1,155.27 C. $3,844.73 D. $8,844.73

B. -$1,155.27

15. 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: A. 1 year B. 2 years C. 26 years D. 28 years

B. 2 years

14. 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: A. 1-5 years B. 5-7 years C. 7-15 years D. 15-30 years

B. 5-7 years

13. 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: A. Lower interest rates than other consumer debt B. Shorter terms than other consumer debt C. Tax-favored status D. Aggressive marketing by lenders

B. Shorter terms than other consumer debt

9. 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? A. The insurance is paid by the lender and protects the lender against loss due to borrower default. B. The insurance is paid by the borrower and protects the lender against loss due to borrower default. C. The insurance is paid by the lender and protects the borrower against loss due to lender default. D. The insurance is paid by the borrower and protects the borrower against loss due to lender default.

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

4. 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: A. government sponsored loans B. conforming conventional loans C. nonconforming conventional loans D. FHA loans

B. conforming conventional loans

28. 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: A. subprime loans B. option ARM loans C. hybrid ARM loans D. alt-A loans

B. option ARM loans

30. 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: A. subprime mortgage loans B. qualified mortgage loans C. hybrid mortgage loans D. alt-A mortgage loans

B. qualified mortgage loans

32. 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?: A. subprime mortgage loans B. qualified mortgage loans C. option ARM loans D. alt-A mortgage loans

B. qualified mortgage loans

1. 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: A. primary mortgage market B. secondary mortgage market C. over-the-counter market D. loan origination market

B. secondary mortgage market

18. 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: A. interest rates will always rise B. the loan always goes to maturity C. the actual life of the loan is shorter than maturity D. upfront fees should be ignored

B. the loan always goes to maturity

34. 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: $$5000. Assume that the opportunity cost is the interest rate on the new loan (5.5%). A. -$5,000.00 B. -$56.52 C. $4,943.48 D. $9,943.48

C. $4,943.48

36. 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. A. 3 months B. 4 months C. 43 months D. 158 months

C. 43 months

17. 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? A. Upfront fees B. Contracted interest rate C. Annual percentage rate D. Teaser rate

C. Annual percentage rate

10. 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: A. FHA loans are targeted toward first-time homebuyers who are in slightly weaker financial circumstances than the typical prime conventional borrower. B. FHA loans are more tolerant in terms of qualifying debt-to-income ratios C. FHA loans require higher credit scores than are needed for prime conventional loans. D. FHA loans contain lower limits on their maximum size than are available through conforming conventional loans.

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

2. Which of the following types of institutions has historically been the largest purchaser of residential mortgages? A. Commercial banks B. Savings and Loans C. Government sponsored enterprises D. Mortgage banking companies

C. Government sponsored enterprises

19. 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? A. Payback period approach B. Net benefit approach C. Interest rate spread D. Net present value approach

C. Interest rate spread

23. In recent years, mortgage lenders responded to the demand from home buyers who were unable to put 20 percent 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 ten percent of the value of the home. This enabled the borrower to obtain 90 percent financing while avoiding the additional cost of PMI. These loans are more commonly referred to as: A. Reverse mortgages B. Home equity loans C. Piggyback mortgage loans D. Subprime mortgage loans

C. Piggyback mortgage loans

24. 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): A. Equity redemption B. Statutory redemption C. Strategic default D. Reverse mortgage

C. Strategic default

5. 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. A. higher B. equal C. lower D. more volatile

C. lower

21. 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: A. conventional loan B. home equity mortgage C. purchase money mortgage D. reverse mortgage

C. purchase money mortgage

43. 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? A. $0 B. $92,696 C. $260,000 D. $352,696

D. $352,696

27. 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 15 years and a loan to value ratio that is greater than 95 percent, the MIP will be what percentage of the average annual loan balance? A. 0.25% B. 0.50% C. 1.10% D. 1.15%

D. 1.15%

25. 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: A. 20% B. 40% C. 60% D. 80%

D. 80%

8. 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. Lower loan-to-value ratio B. Shorter loan term C. Stronger credit record of the borrower D. A "cash-out" refinancing loan

D. A "cash-out" refinancing loan

20. 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? A. Death in the family B. Divorce C. Unemployment D. Mortgage payment spikes

D. Mortgage payment spikes

12. 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? A. Purchase-money mortgage (PMM) B. Piggyback Mortgage C. Home equity loan D. Reverse mortgage

D. Reverse mortgage

31. 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: A. The loan cannot exceed 30 years in maturity B. The loan cannot have fees in excess of three percent (if the loan is greater than $100,000) C. The loan cannot have a debt-to-income ratio greater than 43 percent D. The loan does not require verification of underwriting information from third party records

D. The loan does not require verification of underwriting information from third party records

16. Mortgage loans made to borrowers with normal credit quality, but who lack the necessary documentation of their financial circumstances typically needed to meet conforming mortgage standards would most likely be considered: A. subprime loans B. option ARM loans C. hybrid ARM loans D. alt-A loans

D. alt-A loans