Ch 4

A prepayment penalty is the opposite of a(n):

"or more" clause. (A prepayment penalty imposes a charge on the borrower for paying off the debt early. With an 'or more' clause, the borrower is allowed to prepay the loan at any time with no penalty.)

The Federal Housing Administration (FHA) loan fee can be paid by the:

(The Federal Housing Administration (FHA) loan fee can be paid by either the buyer or the seller. Market conditions and the agreement of the principals will dictate who pays.)

The Real Estate Commissioner's rules:

(The Real Estate Commissioner oversees and administers real estate law, the subdivided lands law, and the regulations of the Real Estate Commissioner. Note these elements are categorized as "laws" and "regulations," not "rules," which carry less effect than either regulations or law.)

A home sold for $300,000. The buyer applied and was approved for a loan with an 80% loanto-value ratio (LTV) with a 20% down payment. The property was appraised for $290,000. How much will the buyer need as a down payment?

. 20% of $290,000 + $10,000 (The $300,000 selling price remains the same regardless of how the down payment is calculated. So with the appraisal at $290,000, the buyer will need 20% of this value. Presuming the sales price is not adjusted, the buyer will need to also place the difference between the sales price and the appraisal ($10,000) as part of the down payment. ORIGINAL NEW ARRANGEMENT $240,000 LOAN $232,000 $60,000 DN. PYMT $68,000 $300,000 TOTAL $300,000)

A homebuyer may rescind a purchase contract on a property for:

. 3 days. (The statutory right to rescind certain contracts runs for a three day period starting from the date the contract is entered into.)

Martin needs $25,000 to buy a new car. He owns a note secured by a $50,000 trust deed. A friend will lend Martin the money if Martin gives him his note and trust deed as security. Martin would use which document to complete this transaction?

. A pledge agreement. (A pledge agreement is the document used to secure a loan using another loan as security where possession is relinquished. This is similar to hypothecation, which also pledges a loan or property as security, yet possession is retained.)

A lender may charge a borrower __________ for preparing federal lending disclosures.

0 (The required lending disclosures under the Real Estate Settlement Procedures Act (RESPA) and the Truth-in-Lending Act (TILA), such as the TILA-RESPA Integrated Disclosure (TRID), must be provided to borrowers at no cost.)

Marta borrowed $25,000 on a straight note. In eight months, she paid $1,500. What was the interest rate:

9%. (This question calls for an interest rate calculation using the following formula: Interest = Principal x Rate x Time (I = PRT). $1,500 = $25,000 x R x 8/12 1,500 = 25,000 x R x 0.667 1,500 = 16,667 x R 1,500 / 16,667 = (16,667 x R) / 16,667 0.09 = R or 9%)

A lender must notify a borrower when a final/balloon payment is due:

90 to 150 days prior to the due date. (The required notice for a final/balloon payment due date is three to five months (90 to 150 days) prior to the due date. The nature of a final/balloon payment, which can be quite large compared to the preceding regular monthly payments, necessitates a significant amount of advance notice.)

Which of the following loans would be most likely to qualify for Federal Housing Administration (FHA) insurance but not for a Veterans Administration (VA) loan guarantee?

A loan to fund the purchase of one-to-four units of residential rental property. (While neither the Federal Housing Administration (FHA) or Veterans Administration (VA) will guarantee properties intended for business (motel or agriculture included), FHA will do small residential rentals (one-to-four units).)

Martin needs $25,000 to buy a new car. He owns a note secured by a $50,000 trust deed. A friend will lend Martin the money if Martin gives him his note and trust deed as security. Martin would use which document to complete this transaction?

A pledge agreement. (A pledge agreement is the document used to secure a loan using another loan as security where possession is relinquished. This is similar to hypothecation, which also pledges a loan or property as security, yet possession is retained.)

The lowest closing costs other than the down payment are realized using a:

CalVET Home Loan. (Closing costs are charges related to the transaction that are paid through escrow. The CalVet Home Loan is a land sales contract and is therefore different from each of the other answer choices. There are no loan charges in this arrangement and thus the escrow charges are lower.)

The loan program that requires payment of mortgage insurance premiums (MIPs) and will make loan payments for up to six months if the borrower becomes involuntarily unemployed is called:

California Housing Finance Agency (CalHFA). (Only the California Housing Finance Agency (CalHFA) offers a loan program on these terms.)

A property owner lost their job. The owner's loan payments were made for them since they had a(n):

California Housing Financing Agency (CalHFA) loan. (Under a California Housing Financing Agency (CalHFA) loan, the CalHFA will make loan payments for a borrower during a period of unemployment.)

Heather, a single mother, is able to get down payment assistance as well as a below market rate of interest on her mortgage. What type of mortgage did she receive?

California Housing Financing Agency (CalHFA). (The California Housing Financing Agency (CalHFA) program offers first-time home buyers special consideration. CalVet is not a mortgage program, and U.S. Department of Veterans Affairs (VA) and Federal Housing Administration (FHA) are insured and guaranteed loans arranged through mortgage brokers and banks.)

The Real Estate Settlement Procedures Acts (RESPA) is administered and enforced by the:

Consumer Financial Protection Bureau (CFPB). (The Real Estate Settlement Procedures Act (RESPA) mandates lenders disclose all mortgage related charges on mortgages used to purchase, refinance or improve one-to-four unit residential properties. RESPA is currently administered and enforced by the Consumer Financial Protection Bureau (CFPB), though was previously overseen by the Department of Housing and Urban Development (HUD).)

Which of the following is true concerning a hard money loan?

It is a cash loan. (Hard money loans are made by a private lender to generate cash for a property owner.)

Which of the following are classified as finance charges under the federal Truth-in-Lending Act (TILA)?

Loan assumption fees. (Only answer selection B. loan assumption fees are classified as finance charges. The key words in the question are "finance charges." All the alternative answer selections are expenses involved in originating a loan.)

A loan broker arranged a home equity loan for $9,600. The broker must provide the borrower with which of the following?

Mortgage loan disclosure statement. (A lender who originates a home equity line of credit (HELOC) is required to deliver a copy of the mortgage loan disclosure statement to the borrower.)

Who pays the points on a CalVet Home Loan?

No one pays the points. (No points are charged on a CalVet loan. It is a land sales contract.)

When the debt has been paid in full, the trustee will record what legal instrument to remove the lien on a trust deed from the public record?

Reconveyance deed. (A trustee records a reconveyence deed to release a trust deed.)

Just as disclosure laws are written to protect the consumer, who benefits the most when a lender requires an impound account of property taxes and insurance for a real estate loan?

The lender and the trustor. (Both the lender and the trustor (borrower) benefit from the existence of an impound account since it guarantees the necessary funds will be available for property taxes and insurance when they are due.)

What does "discounting" refer to in the context of real estate finance?

The loan proceeds disbursed to the lender when reselling a note and trust deed. (A mortgage can be resold to an investor after it is originated. In order to convert a future income stream into cash, the lender needs to "discount" its value. In other words, a dollar in the future may be worth eighty cents cash today.)

Who generally benefit the most by a subordination clause in a trust deed?

The trustor. (The borrower (trustor) benefits the most from a subordination clause since this makes it easier to obtain an additional loan on their property. For example, the buyer of vacant land can obtain a construction loan more easily if the loan against the land will be subordinated to the construction loan.)

Which of the following is true regarding promissory notes?

They are the evidence of the debt. (Promissory notes are the evidence of debt. Trust deeds are security for debt. Though promissory notes and trust deeds are frequently used as the loan instruments, there are alternatives, such as a land sales contract. Note when the word "always" appears in an answer choice, one exception defeats its accuracy.)

A buyer is most likely able to borrow 100% of the purchase price with which of the following types of financing?

Veterans Administration (VA). (The Federal National Mortgage Association (FNMA) is not a primary lender and neither conventional nor Federal Housing Administration (FHA) lenders have programs that generally allow the borrower to borrow 100% of the purchase price.)

The Real Estate Settlement Procedures Act (RESPA) applies to:

a U.S. Department of Veterans Affairs (VA)-guaranteed loan. (The Real Estate Settlement Procedures Act (RESPA) applies to residential one-to-four unit properties only. RESPA is federal legislation prohibiting brokers from giving or accepting referral fees if the broker or their agent is already acting as a transaction agent in the sale of a one-to-four unit residential property which is being funded by a purchase-assist, federally-related consumer mortgage. Thus, only answer selection B falls under RESPA.)

The term warehousing in reference to mortgage financing describes:

a mortgage broker who packages loans prior to their sale on the secondary market. (Warehousing in finance is similar to a retailer concept. Mortgage brokers bundle loans for sale on the secondary market.)

Deficiency judgments can only be granted when:

a property has been judicially foreclosed. (Only judicial foreclosures handled through the courts can demand a deficiency judgment if the price received for a property is less than the outstanding mortgage balance.)

A lender most likely to make a loan to a borrower with a FICO score of 500 would be:

a subprime lender. (Subprime lenders are those that make loans to less qualified borrowers and will hold the loans they originate.)

Which of the following is not required when a trust deed is paid in full?

a. The trustor's signature.

A residential mortgage primarily for personal, family or household use and secured by a deed of trust on a dwelling is known as a:

a. consumer purpose mortgage. (A debt incurred primarily for personal, family, or household purposes and secured by a parcel of real estate containing one-to-four residential units is known as a consumer mortgage.)

Under the Federal Truth-in-Lending Act (TILA), the cost of credit is expressed as:

an annual percentage rate. (Financing costs are stated as an annual percentage rate (APR).)

A buyer purchasing a property with Federal Housing Administration (FHA)-insured financing normally does each of the following, except:

apply directly through the FHA. (This is an EXCEPT question. Homebuyers do not apply directly to the Federal Housing Administration (FHA) for a mortgage. The FHA insures mortgages but does not fund them.)

If a lender accepts a deed-in-lieu of foreclosure, the lender:

assumes any junior liens. When the holder of the first trust deed accepts a deed-in-lieu, they become responsible for all liens junior to their position.

Which of these documents provides the most protection to a property owner in default?

b. A mortgage. (A mortgage requires a judicial foreclosure and thus offers the greatest protection as the owner is provided a longer period of time to cure the default. A trust deed is generally foreclosed through a nonjudicial trustee's sale, which can occur more quickly and provide little opportunity for the owner to cure the default. A land sales contract is a quiet title court process, and a default on a fixed-term lease with an option to buy is remedied with an unlawful detainer action, both of which are relatively short and simple legal processes.)

Any final payment on a note which is greater than twice the amount of any one of the six regularly scheduled preceding payments is known as a:

balloon payment. (Any loan that is not fully amortized will require a final/balloon payment of the balance owing.)

A clause in a trust deed calling for an assignment of rents most benefits the:

beneficiary. (An assignment of rents clause allows the lender to collect the rents on an income-producing property when the borrower defaults on the underlying loan.)

A mortgage broker's fee is customarily paid by the

borrower

In the context of mortgage finance, a beneficiary statement is made:

by the lender to state the current balance required to pay off a real estate loan. (A lender (beneficiary) delivers a beneficiary statement to escrow as a statement of required funds to release the existing debt.)

A bank loans Lauren $850,000. Part of the loan agreement calls for Lauren to keep $20,000 of theloan funds on deposit with the bank for the life of the loan. This is an example of:

compensating balance. (This question illustrates the need to select the best answer available. The correct term for what the bank has required is a compensating balance - leaving enough money with the bank to offset potential foreclosure costs. It can also be said to improve the yield and reduce the lender's risk.)

A CalVET buyer finances the property with a:

contract of sale. (CalVET loans are land contract purchases with the state functioning as the vendor.)

When the Federal Reserve (the Fed) increases the reserve requirements, referred to as tight money policy, it will:

decrease loan activity. (The tightening of money allows less money to be available for lending, resulting in a decrease of loan activity.)

A graduated payment adjustable mortgage (GPAM) provides for:

deferment of certain payments on the principal during the early years of the loan. (The unique quality to a graduated payment adjustable mortgage (GPAM) is the fact that payments are increased periodically over the life of the loan, making it lower in the early years.)

Consider a recorded trust deed that refers to a template of standard clauses contained in a previously recorded trust deed. The previously recorded trust deed is called a ________trust deed.

fictitious (A previously recorded trust deed containing standard clauses is a fictitious trust deed.)

Bruce sold his home for $215,000 to Maria and carried back a $150,000 note with interest at 6% per annum. The note was secured by a first trust deed. The home had a fair market value (FMV) of $200,000. Later, Bruce sold the trust deed and note at a discounted price of $135,000 to Syndi. On the back of the note, Bruce wrote, "I hereby assign the within note to Syndi without recourse." If Maria defaults before any principal payments are made, Syndi's best legal remedy is to:

foreclose to enforce payment of the $150,000. (The demand would be on Maria for the full amount of the monies owed regardless of the discounted price paid for the note.)

The maker of a negotiable instrument is able to defend against a holder in due course in the event of:

forgery & incapacity. (Both forgery and incapacity are a suitable defense against a holder in due course. A holder in due course is one who has taken a note, check or bill of exchange in due course: 1. before it was overdue; 2. in good faith and for value; and 3. without knowledge that it has been previously dishonored and without notice of any defect at the time it was negotiated.)

Total foreclosure time under a trustee's sale on a trust deed is minimally:

four months. (A trustee's sale includes a three month redemption period followed by three weeks of advertising the sale for a total just short of four months if the sale is processed without any delay. In practice, it is generally longer.)

Inflation can be seen in the:

increase in the cost of living. (Inflation is the reverse of deflation. Therefore, money becomes worth less and products become more expensive.)

Which of the following is most important to a lender when determining whether to fund a loan?

its relative risk of funding the loan. (The most important consideration of a lender when determining whether to originate a loan is the level of risk it is exposed to. While the other answer selections are valid concerns, lenders are primarily motivated by the avoidance of risk. For instance, a high profit margin would be of lesser importance if the risky loan promptly goes into default.)

The person or organization named on a trust deed as the beneficiary is most likely the:

lender. (The beneficiary on a trust deed is the lender, i.e., the holder of a note secured by a trust deed that is entitled to the performance of the provisions in the trust deed. In the context of a mortgage, this is the mortgagee.)

A "seasoned" loan is a(n):

loan in which there is a record of consistent and timely payments made on the loan. (You are correct. A seasoned loan has a consistent history of loan repayment. An investor may feel more inclined to purchase a seasoned loan as they are confident the borrower will continue to make the required payments.)

When a loan is secured collaterally, the loan is a(n):

loan secured by another loan. (A collateralized loan is one secured by another loan, rather than a property.)

Regulation Z (Reg Z) of the Federal Truth-in-Lending Act (TILA) gives the borrower a 3 day right of rescission when the loan is:

loan to refinance the borrower's personal residence. (Regulation Z (Reg Z) of the Federal Truth-in-Lending Act (TILA) applies to one-to-four unit residential properties, therefore answer selections A and D do not apply. Further government loans have their own restrictions.)

Compared to a loan insured by a government entity, a conventional loan has a:

lower loan-to-value (LTV) ratio. (Conventional loan programs generally require a lower loan-to-value ratio.)

The interest rate on a Federal Housing Administration (FHA)-insured loan is set by:

negotiation between the lender and borrower. (The Federal Housing Administration (FHA) insures loans and does not originate them. The loan is made by a lender and FHA provides insurance to the lender in the event of borrower default. As with other loans, the interest rate is negotiated between the lender and the borrower.)

A lender can enter into an agreement with both a buyer and a seller for the buyer's assumption of the loan and a release of the seller's liability, called a:

novation and substitution of liability amount to the same thing. A novation agreement entered into by a mortgage holder, buyer and seller will substitute liability for a mortgage obligation to the buyer by an assumption.)

The maximum number of properties that can be covered by a trust deed without a blanket encumbrance is:

one. (Only one property may be covered by a single trust deed without a blanket encumbrance. Alternatively, a blanket trust deed covers more than one property.)

A mortgage which provides for securing the amount of the initial loan together with any sums later loaned to the mortgagor is known as a(n):

open-ended mortgage. (An open-ended loan is one that allows for future advanced monies as part of the original commitment, such as a home equity line of credit (HELOC).)

The buyer in a sale leaseback transaction would be least concerned with the:

original cost to construct the building. (In any purchase, the original cost of the construction is of least importance.)

Changes in mortgage financing terms will affect the:

price only. (Changes in mortgage financing terms affect real estate prices. Value is a matter of worth and perception, and is therefore not affected by financing costs. The use of a property is also unaffected.)

One of the primary purposes of the Real Estate Settlement Procedures Act (RESPA) is to:

provide consumers with enough information to enable them to effectively shop for settlement services. (While standardizing costs may seem likely a reasonable goal, the Real Estate Settlement Procedures Act (RESPA) is primarily intended to insure that consumers are not being charged hidden fees and have the information they need to make an educated decision between competing lenders.)

When the Federal Reserve (the Fed) intends to tighten the amount of money in circulation, it sells government bonds on the open market and:

raises the amount of reserves required for member banks. (The Federal Reserve (the Fed) can require larger reserves for member banks and sell government bonds to reduce the amount of cash in circulation. This is known as tight monetary policy.)

In a carryback transaction, the seller as the beneficiary:

receives the promissory note and trust deed. (When the seller extends carryback financing to a buyer, the seller receives the note and trust deed, much like a lender. This is an excellent opportunity to consider what each participant does in a carryback loan arrangement. Both documents are signed by the buyer/borrower. The trustee plays no role at this time.)

A large down payment on real estate generally does not:

reduce the amount of equity an owner holds in their property (With a higher down payment, there is less risk to the lender that the borrower will default since the borrower has a greater equity stake in the property. A higher down payment will lower the overall expense of mortgage interest for the buyer as the principal amount borrowed will be lower. Further, higher down payments tend to promote more stable home ownership as owners have "greater skin in the game" and more impetus to avoid default.)

An owner's right to bring current any monetary or curable default stated in the notice of default (NOD) prior to five business days before the date of the sale is called:

reinstatement. (When full payment of arrears and costs have been made, the loan has been reinstated, bringing the loan current and placing the borrower in good standing.)

in real estate loans, the term "impounds" most nearly means:

reserves. (When a lender requires impounds, they are demanding that monthly payments be made to establish a reserve fund to pay future property tax and insurance expenses.)

The owner of a residential property found guilty of discrimination in violation of the Rumford Act may be required to:

sell or rent the property to the aggrieved person. b. find a similar property to rent to the aggrieved person if one is available. c. pay a civil penalty of $10,000. (The California Rumford Act may carry potential penalties for discrimination violations, including being forced to sell or lease the property to the aggrieved person, locating a similar property for them or civil penalties up to $10,000.)

The sale of property in which the amount of the net proceeds is less than the principal balance owed but is accepted by the lender in full satisfaction of the loan is called a(n):

short sale. (Short sales are those where a lender has accepted as full consideration sale proceeds that are short of the amount owed.)

The release clause in a trust deed is there to release:

some properties upon partial payment, when more than one property is used as security for the debt. (When several properties are securing one loan, known as a blanket mortgage, a release clause allows individual properties to be withdrawn from the obligation.)

A seller carryback note is classified as a __________ lien.

specific (As a specific lien, a seller carryback note will stipulate the specific property that is securing the loan. If this is an income tax lien, it will be attached to everything the person owns and be classified as a general lien.)

A note payable for "interest only" is called a(n):

straight note. (Interest only loans are those that are not amortized as payments are not applied to the underlying principal.)

A(n) _____________ provision in a trust deed allows future loans on the property to have priority.

subordination clause (To subordinate a loan indicates the loan is to take a secondary position. In finance this implies that future loans will have a priority over the subordinated loan.)

Rental housing loans can be insured or guaranteed through:

the Federal Housing Administration (FHA). (Of the choices offered, only the Federal Housing Administration (FHA) will insure rental property loans. CalVET and CalHFA properties require owner occupancy. The American Land Title Association provvides title insurance.)

On each payment of an amortized loan:

the amount applying to the principal increases with each payment. (With an amortized loan, whether fully or only partially amortized, the balance of the loan is reduced with each payment. Therefore, the interest portion of the payment decreases and the principal portion increases with each payment made.)

When the buyer takes title to the property subject to the existing loan, "subject to" most nearly means:

the buyer will not be personally liable for the loan. (As opposed to assuming a loan, when the buyer takes title "subject to" an existing loan, the seller remains liable for the debt.)

the mortgage insurance premium (MIP) paid on a Federal Housing Administration (FHA) loan protects:

the lender. (The mortgage insurance required for Federal Housing Administration (FHA)-insured loans are for the protection of the lender.)

The Federal Truth-in-Lending Act (TILA) defines the annual percentage rate (APR) as:

the relative cost of credit expressed in percentage terms. (The annual percentage rate (APR) is stated as a percentage and represents the total cost of credit including the prepaid interest costs (points).)

A second trust deed can be distinguished from a first trust deed by:

the time and date of recording. (The priority of trust deeds is determined by the time and date of recording.)

In a period of deflation:

the value of money increases. (Deflation is the opposite of inflation where money becomes worth less.)

hypothecate means:

to give a thing as security without giving possession. (To hypothecate is to offer property (real or personal) as security for a loan without giving up possession.)

The primary purpose behind the creation of the Federal National Mortgage Association (FNMA) was:

to increase the money available to housing. (The Federal National Mortgage Association (FNMA) was created to repurchase qualifying loans, thus placing cash in the lenders' hands to facilitate a continuing source of monies to loan.)

The power to sell a property in the event of a default under the terms of the trust deed is given by:

trustor to the trustee. (It is the borrower (trustor) who gives the authority to sell to the trustee.)

Whether property functions as adequate security for a real estate loan depends on the:

value of the property. (To establish whether a property represents adequate security for a loan, the value of the property needs to be determined by an appraiser.)

A dragnet clause in a mortgage covers:

whatever future advances may be made on a loan. (In the context of mortgages, dragnet reflects any future advances made to or on behalf of the borrower.)

Lenders use a debt-to-income ratio (DTI) to determine:

whether a borrower qualifies for a loan. (The debt-to-income ratio (DTI) sets the amount of debt a borrower can carry in relation to their income. A higher DTI represents a higher degree of risk of borrower default.)

An all-inclusive trust deed (AITD), also known as a(n) , reduces the seller's risk of loss and defers more profit taxes than a regular second trust deed note.

wraparound mortgage (Another name for an all-inclusive trust deed (AITD) is a wraparound mortgage.)