Chapter 10

if a borrower's house is worth $200,000, the borrower has a first mortgage balance of $100,000, and a HELOC lender will give a home equity line of credit loan such that the total mortgage balance is 80 percent, then the maximum line of credit will be ____.

$60,000

Valid statements about FHA insurance include:

FHA accepts more tolerant qualifying ratios and credit score than for conventional mortgages. FHA insures loans up to 96.5 percent of value. FHA targets first-time home buyers and other moderate income households.

The largest participants in the secondary mortgage market are ____ ____ and ____ ____.

Fannie. Mae. Freddie. Mac.

Which of these statements is (are) correct about conventional mortgage loans?

Is the oldest form of home mortgage loan. Is the most common type of home mortgage loan. In recent years has been created in three different qualities.

Housing assistance programs in the United States since World War II have been predominantly through:

The home mortgage lending system

Variations of the I-O mortgage include:

a standard I-O but with lender's promise to fund pay off in 5-7 years with a fully amortizing loan. a loan that is I-O for 15 years and then converts to fully amortizing level payment for the remaining term.

A VA loan can reduce the cash obligation of the borrower to:

closing costs only

A conventional home mortgage that meets all of the requirements to be purchased by Fannie Mae or Freddie Mac is called a ____ conventional mortgage.

conforming

Of the several reasons why net benefit analysis and net present value analysis can overstate the value of refinancing, one that applies only to a minority of U.S. households today is:

income tax effects

The fundamental problem with the option ARM loan, as most commonly used, was that it created a rapid increase in the:

loan balance

Home equity credit lines can offer homeowners several advantages over other consumer loans, including:

longer term. lower interest rate. tax deductible interest.

In the first half of the 20th century the need for efficient systems for home financing grew strongly, compelled by the growing need in urban society for household:

mobility

Originators of mortgage loans include:

mortgage brokers. savings and loan associations and credit unions. mortgage banking companies. commercial banks.

While government agencies generally classify any mortgage that finances a home ____ as a purchase money mortgage, real estate brokers limit the term to any mortgage lien given from a ____ to the ____.

purchase. buyer. seller.

A central characteristic of most subprime and Alt-A loans was that at some point the borrower would be forced by the threat of a large payment increase to ____ in order to postpone the increase.

refinance

Common sources of a home equity loan can include:

savings institutions. credit unions. commercial banks.

When interest rates became very volatile in the 1970s the main home mortgage lenders, S&Ls and banks, faced a devastating maturity mismatch problem due to ____ term liabilities and ____ term home mortgage assets. They could reduce this problem by changing their mortgage loans to ____ ____ mortgages.

short. long. adjustable. rate.

A purchase money mortgage, in general, is any mortgage loan created simultaneous with exchange of ____.

title

A fundamental problem in comparing the cost of mortgage loans is that cost is a combination of upfront expenses and annual interest. To solve this problem, APR converts ____ ____ into ____ ____.

upfront. expenses (or charges). annual. interest.

The loan origination market - where loans are created - is called the ____ mortgage market.

primary

An event that enabled the long maturity and high loan-to-value ratio of modern prime conventional mortgages was the creation after World War II of ____ ____ ____.

private. mortgage. insurance.

The central guide on how much debt a homeowner should place on their house is whether the borrowing cost of additional debt exceeds the:

productivity or usefulness of the funds obtained

The most important effect on housing when interest rates rise is to make housing:

less affordable

Loans eligible for purchase by Fannie Mae and Freddie Mac are much more ____, resulting in a lower contract ____, and more ____ terms ____ across lenders and regions.

liquid. interest. rate. uniform (or equal).

Suppose you have a $200,000 home mortgage with a monthly payment of $1,150 and you also have credit card debt of $20,000 with a monthly payment of $300 per month. Interest rates have declined so that your mortgage loan would have a payment of $1,000 if the only change in it were to adopt the market interest rate. Moreover, you can increase your debt to $220,000 and pay off the credit card debt. Your current combined monthly payment is $1,450. To examine the net benefit of refinancing both loans with the $220,000 mortgage, what would be your new payment for the purpose of computing net benefit?

(220,000/200,000) x $1,000

By far, the most important home equity conversion or reverse mortgage program is that of ____.

FHA

A guide rule for determining whether refinancing a home loan is beneficial should account for which of the following "dimensions"?

How long you will keep the loan. Amount of interest rate "spread". Cost of refinancing.

Th attraction of the interest-only mortgage that brought it back into home finance in the pre-Great Recession years was that it:

Offered a relatively low payment

Some factors that affect the premium charged for PMI include:

borrower's credit record. length of loan term. loan-to-value ratio. use of property (owner occupied, rental, second home).

If a refinance decision involves replacing multiple loans with an increased first mortgage loan the solution involves:

compute the "old" payment as the sum of all the payments to be replaced. for each old loan, compute the reduction in payment with the new interest rate, keeping all other terms as they were. compute the difference between all old payments and all revised payments and proceed as with a single loan replacement.

The maximum guarantee on a VA loan is one fourth of the loan limit for ____ conventional loans, those acceptable for purchase by Fannie Mae or Freddie Mac. In effect, this sets the maximum VA loan amount equal to the conforming conventional maximum.

conforming

Any standard home loan that is not insured or guaranteed by an agency of the US government is a ____ mortgage loan.

conventional

Private mortgage insurance applies to ____ mortgage loans, and generally is required on mortgages with a loan-to-value ratio exceeding ____ percent of value.

conventional. 80 (or eighty).

A conventional mortgage loan that meets all the requirements of Fannie Mae and Freddie Mac except that it is too large is called a ____ conventional mortgage.

jumbo

In the FHA Home Equity Conversion Mortgage (HECM) program FHA commits to the lender that if the balance at sale exceeds the value of the house, FHA will pay the difference to the ____.

lender

In the simplest form of a reverse mortgage the ____ makes regular or occasional payments to the ____ and the loan is not paid off until sale of the property.

lender. borrower (or homeowner).

A second mortgage loan created at purchase along with a first mortgage of no more than 80 percent of value, can provide an alternative to mortgage insurance as a way to increase total financing above 80 percent of value. This kind of mortgage is called a ____ mortgage.

piggyback

Subprime and Alt-A loans were mostly distinguished not so much by their loan design but by lending ____ and borrower ____.

practices. circumstances.

Characteristics of an interest-only mortgage include:

the full balance must be paid off at maturity. the regular payment is significantly lower than with the level payment mortgage. the interest rate can be fixed or adjustable. payments are strictly interest.

Cancellation of PMI may be allowed after the loan balance is below ____ percent of current market value, and, by law, must be terminated when the loan balance is below ____ of original value.

80 (or eighty). 78 (or seventy-eight).

Private mortgage insurance protects only a ____ and only against losses due to ____.

lender. default.

The long-term fixed-rate level-payment home mortgage works best in an environment of ____ and ____ interest rates.

stable. low.

Homeowners generally do not default by choice on a home mortgage loan, even when the value of the house is below the mortgage balance. Reasons for this can include:

the value of living in the house exceeds the monthly cost. relocation costs, both financial and non-financial. resulting household disruption. resulting damage to one's credit.

Whether you should conduct refinancing analysis on a before tax basis or after tax basis depends on two considerations in US income tax law. You should use before tax analysis if:

you use a standard deduction rather than itemizing deductions you itemize deductions, but your total deductions, including interest, are little more than the standard deduction.

Ling and Archer offer Net Benefit Analysis, a "short cut" approach to refinance analysis. If the result is positive, refinancing may be beneficial. If it is negative, refinancing is not beneficial. What is the order of the steps involved?

1. determine your current loan payment and how many more months you expect to make the payment 2. recompute your loan payment as if it were at the current market interest rate available to you (change only the interest rate on your loan) 3. find the resulting reduction in your payment and multiply the difference by the number of months you expect to retain the loan 4. compute the costs of refinancing 5. find the difference between the sum of payment reductions and the cost of refinancing

Under 2017 U.S. income tax law, it has been estimated that ________ percent of all homeowner households will receive income tax deductions for the home mortgage interest that they pay.

15

Private mortgage insurance commonly protects the lender against the first ____ to ____ percent of losses on a mortgage loan due to default.

25 (or twenty-five). 35 (or thirty-five).

Department of Veterans Affairs (VA) loans can be up to ____ percent of value for qualified veterans.

100 (or 100%)

The interest rate on a home equity line of credit normally is ____, based on the prime rate as published in the Wall Street Journal.

adjustable

The predominant approaches to housing assistance by the U.S. government have been through:

Guarantees against mortgage default. Insurance against mortgage default. Allowing state and local governments to issue tax-free housing finance bonds.

Improving the housing finance system has these positive effects on society:

Home owners can sell their home more easily. Home owners can gain greater financial liquidity and diversification. Households can become home owners sooner in life.

Before innovations (brought by FHA), the typical home loan had which of these features:

Term of just a few years. 50-60 percent loan-to-value. Large "balloon" payment at maturity.

Valid aspects of housing assistance programs include:

The Veterans Administration guarantees home loans for qualified veterans. The Federal Housing Administration insures home loans for qualified borrowers. The USDA Rural Housing Services makes direct home loans to qualified rural households. state and local housing agencies make low interest loans to qualified households.

The premium on PMI is some combination of a lump sum payment at loan ____ or ____ installments.

origination. monthly.

APR, while valuable in comparing the costs of mortgage loans has one main limitation: APR assumes the loan is never ____, while this actually happens to almost every home loan during the early part of its term.

prepaid

Two polar classes of conventional mortgage loans are ____ and ____.

prime. subprime.

The FHA provides insurance against losses due to default on mortgages made by ____ lenders, with the insurance premium paid by the ____.

private. borrower.

With the option ARM, the minimum payment eventually reset to a fully amortizing level to pay off the now enlarged loan. The threat of the payment increase often forced the borrower to count on appreciation of the house and seek ____ to start the cycle over.

refinancing

The Qualified Mortgage created in the Dodd-Frank Act of 2010 sets an ability-to-____ standard for most home mortgages. Loans meeting the standard receive "safe harbor" protection against legal defenses of the ____ in case of default.

repay. borrower.

As the loan-to-value (LTV) of a loan is higher the effective interest cost increases. This can result from multiple factors, including:

required mortgage insurance above 80 percent LTV. Higher interest rate on the first mortgage due to higher risk classification. Higher cost of a "piggyback" second mortgage.

Two refinance "rules of thumb" commonly offered in the media are a spread rule and a payback rule. Between these two rules, the ____ rule is particularly deficient, amounting to an attempt to use a single dimension answer for a multi dimension problem.

spread

Of the reasons why net benefit analysis and net present value analysis may overstate the value of refinancing a home mortgage loan, which is likely to be most common among average homeowners?

the "hassle" (time and discomfort) involved

Factors in the population that compel interest in reverse mortgages include:

A large percentage of elderly homeowners own a house outright, but have low income. The population of elderly homeowners is growing. Most elderly homeowners want to stay in their home as long as possible.

Important programs and contributions of FHA include:

An important emerging program of FHA is the home equity conversion mortgage (HECM) program for elder homeowners. The FHA influence was so great in the middle of the 20th century that it influenced housing and subdivision standards across the U.S.. FHA insurance made possible the first long-term level-payment home loan.

Initially, Qualified Mortgages include mainly::

all conforming conventional loans. those meeting the requirement specified in the Dodd-Frank Act. all FHA and VA loans.

Reasons why both Net Benefit and Net Present Value analysis of refinancing tend to overstate actual benefits include:

cost of personal time and hassle. risk that rates could decline further. income tax effects.

"Trigger" events that may precipitate home mortgage default under the right conditions can include:

divorce. abrupt payment increase. unemployment. death in the household. health failure.

Alt-A loans were characterized mainly by high loan-to-value ratio, high interest rate and no ____ of borrower financial circumstances.

documentation

The main risk of a reverse mortgage, called mortality risk, is that the accumulating balance on the loan will ____ the value of the ____.

exceed, outweigh, or surpass. house, property, or home.

Characteristics of Qualified Mortgages include:

fees no greater than 3 percent. term no longer than 30 years, ARM loans must be underwritten to highest rate in first five years. fully amortizing, with level payments.

Features of the hybrid mortgage loan include a(n) ____ rate for the first few years, followed by a(n) ____ rate for the remainder of the loan term. At all times the regular payment is sufficient to fully ____ the loan by the end of the term.

fixed. adjustable. amortize, payoff, or repay.

The option ARM typically allowed the borrower to select among several choices of payments, including;

fully amortizing payment. minimum payment resulting is significant negative amortization. interest only payment.

A general guide to the amount of debt financing on a home is that you should use debt financing up to the point where the interest cost of more debt financing is ____ than the return the additional equity funds released can earn in other uses.

greater, higher, more, or larger

The central question in the refinancing decision is whether the value of future reductions in loan payments is ____ than the cost of refinancing.

greater, more, larger, or higher

When a loan is paid off early it can change the effective interest cost of the loan because any upfront expenses are effectively spread over a shorter time span, causing them to equate to a ____ interest charge increment. So the earlier the prepayment, the ____ the resulting effective interest cost.

higher, larger, or greater. higher, larger, or greater.

The hybrid mortgage is interesting as a solution to a long-standing conflict between home mortgage borrowers and depository lenders. The ____ wants interest rates and payments to adjust as frequently as possible while the ____ wants as much payment predictability as possible.

lender. borrower.

Two conditions that generally appear to be required before a "trigger event" causes home mortgage default are;

negative equity. value of housing services falling below the monthly cost.

The most complete approach to the refinancing question is to view it as a question of ____ ____ ____.

net present value

Most subprime loans were:

option ARM. 2-28 hybrid. interest only.

Attractions of the hybrid mortgage include:

the borrower has fixed payments during the early, most budget-sensitive years. the lender faces much lower interest rate risk than with a fixed rate loan. the borrower can expect a rate lower than a standard fixed rate since the fixed term is shorter.

The most complete guides for mortgage refinancing decisions in use today account not only for interest rate spread, cost of financing and time you will keep the new mortgage, but also:

the effect of time value