Real Estate Test 2 7-11

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)

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%

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:

15-30 years

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:

2 years

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

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

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:

7 years

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%

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

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.

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. 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

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.

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

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 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 anti-discrimination 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

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

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)

Even after a property goes into foreclosure, it is still possible for the borrower to reclaim the property as long as they produce 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

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 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

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

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

Home Ownership and Equity Protection Act (HOEPA)

It may be appropriate for a real estate professional to utilize 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

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

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

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.

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.

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 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

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

Local property taxes

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:

Location

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

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)

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?

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.

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:

Mortgage

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)

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

Which of the following measures is considered the fundamental determinate 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.

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

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:

Piggyback mortgage loans

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

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

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

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 they produce 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

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 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:

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 schedule of rental rate increases over the term of the lease.

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

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.

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

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

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

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)

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.

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.

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:

alt-A loans

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 five and fifteen percent

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

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

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

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

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

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

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

potential Gross Income

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

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