RES 332 Final
Suppose an institution has purchased a $250,000 mortgage loan from the loan originator and wishes to create a mortgage pass-through security. In doing so, this institution will generate revenue by charging a servicing fee of 35 basis points. If the monthly mortgage payment on the loan is $1,250, how much income is passed through to the investor in the mortgage pass through each month (rounded to the nearest dollar)?
$1,177
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?
$1,355.47
Given the following information on a fixed-rate fully amortizing loan, determine the maximum amount that the lender will be willing to provide to the borrower: loan term: 30 years; monthly payment: $800; interest rate: 6%.
$133,433
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.
$139.13
Given the following information on a 30-year fixed-payment fully amortizing loan, determine the remaining balance that the borrower has at the end of seven years: interest rate: 7%; monthly payment: $1,200.
$164,402
You have taken out a $300,000, 5/1 ARM. The initial rate of 5.4% (annual) is locked in for five years. Calculate the payment after recasting the loan (i.e., after the reset) assuming the interest rate after the initial lock period is 8.0%. (Note: the term on this 5/1 ARM is 30 years.)
$2,138.02
Assume you have taken out a balloon mortgage loan for $2,500,000 to finance the purchase of a commercial property. The loan has a term of 5 years but amortizes over 25 years. Calculate the balloon payment at maturity (Year 5) if the interest rate on this loan is 4.5%.
$2,196,447.59
Assume you have taken out a partially amortizing loan for $325,000 that has a term of 7 years but amortizes over 30 years. Calculate the balloon payment at maturity (year 7) if the interest rate on this loan is 4.5%.
$282,835.42
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?
$352,696
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: $5,000. Assume that the opportunity cost is the interest rate on the new loan (5.5%).
$4,943.48
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.
$7,157.35
While a variety of loan terms are available in a lender's mortgage menu, the most common loan term on a level-payment mortgage is
30 years
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.
43 months
In analyzing a borrower's credit worthiness, the lender will typically examine the borrower's FICO score (a product developed by the Fair Isaac Corporation). High-quality (prime) borrowers are those with a credit score above
660
Given the following information, calculate the effective borrowing cost (EBC): loan amount: $175,000; term: 30 years; interest rate: 7%; payment: $1,164.28; discount points: 1 point; origination fee: $3,250. Assume the loan is held until the end of year 10.
7.4%
Given the following information about a fully amortizing loan, calculate the lender's yield (rounded to the nearest tenth of a percent): loan amount: $166,950; term: 30 years; interest rate: 8%; monthly payment: $1,225.00; discount points: 2
8.2%
Given the following information, calculate the effective borrowing cost (rounded to the nearest tenth of a percent): loan amount: $166,950; term: 30 years, interest rate: 8%; monthly payment: $1,225.00; discount points: 2; other closing expenses: $3,611.
8.5%
Traditional home mortgage underwriting is said to rest on three elements, the "three C's." The housing expense ratio is one tool that lenders will use to address concerns associated with which of the "three C's"?
Capacity
Even after a property goes into foreclosure, it is still possible for the borrower to reclaim the property as long as he or she produces 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
The Federal National Mortgage Association (Fannie Mae) was originally established to provide a secondary market for FHA-insured and VA-guaranteed loans. All of the following statements regarding Fannie Mae are true except
Fannie Mae lends money directly to homebuyers.
Construction loans are used to finance the costs associated with erecting the building or buildings on a site. All of the following would be typical of a construction loan except
LTV ratios above 90 percent.
A special contract in which the borrower pledges the mortgaged property as security to the lender is commonly referred to as the
Mortage(deed of trust).
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
Assume that a borrower has a choice between two comparable fixed-rate mortgage loans with the same interest rate, but different mortgage terms, one being a 30-year mortgage and the other a 15-year mortgage. Under financially unconstrained circumstances, which of the following statements best describes the borrower's preference?
The borrower would be indifferent between the two mortgages.
Let's suppose that a lender has established a 90% loan-to-value ratio cutoff as one of its primary underwriting criteria. If a borrower is willing to make a down payment of $125,000 on a home recently appraised at $550,000, which of the following best describes the lender's decision on whether or not to approve the loan along this dimension?
The lender approves the loan because the LTV ratio is less than 90%.
When lenders charge discount points (prepaid interest) on a loan, what impact does this have on the loan's yield?
The yield on the loan will increase.
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
Required by the Truth-in-Lending Act, the annual percentage rate (APR) is reported by the lender to the borrower on virtually all U.S. home mortgage loans. The APR accounts for all of the following except
any prepayment of principal to be made on the loan.
Partially amortizing mortgage loans require periodic payments of principal but are not paid off completely over the loan's term to maturity. Instead, the balance of the principal amount is paid at maturity in what is commonly referred to as a
balloon payment.
An interest-only balloon mortgage loan is commonly referred to as a(n)
bullet loan
Traditional home mortgage underwriting is said to rest on three elements, the "three C's." Recent research (e.g., Archer and Smith, 2011) has confirmed that the underwriting characteristic most strongly associated with default is
collateral.
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
Although nonrecourse loans dominate the commercial mortgage lending practices of pension funds, life insurance companies, and commercial mortgage-backed security (CMBS) originators, banks are likely to require some form of a guarantee by the organizer/sponsor of the investment opportunity to make the lender whole in the event the lender suffers a loss on the loan. This protection to the lender is more commonly referred to as a:
credit enhancement
Although nonrecourse loans dominate the commercial mortgage lending practices of pension funds, life insurance companies, and commercial mortgage-backed security (CMBS) originators, banks are likely to require some form of a guarantee by the organizer/sponsor of the investment opportunity to make the lender whole in the event the lender suffers a loss on the loan. This protection to the lender is more commonly referred to as a:
credit enhancement.
While floating-rate mortgage loans may offer lower interest rates to borrowers than comparable fixed-payment mortgages, floating-rate loans may increase a lender's exposure to which of the following risks since borrowers may not be able to continue to service the debt if payments on the loan increase significantly?
default risk
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
Land acquisition, development, and construction loans used by developers differ significantly from the "permanent" mortgages that traditionally are used to finance the purchase of commercial properties. All of the statements listed below are true regarding land acquisition, development, and construction loans except
developers can never be held personally liable for such loans.
Suppose that a mortgage bank locked in an interest rate for a prospective borrower at 8.5%. However, prior to the loan closing, the market mortgage rate falls to 7.5%. In this scenario, the mortgage banker would be most concerned with which of the following risks?
fallout risk
When the contract rate at closing is less than the current market rate (i.e., interest rates have increased since the time of the loan commitment), the mortgage banker will have to sell the newly originated loan at a discount. This scenario best depicts the mortgage banker's exposure to which of the following risks?
interest rate risk
Commercial banks most commonly provide floating rate loans. However, borrowers who prefer a fixed rate can obtain an agreement that exchanges floating rate payments for a fixed-rate schedule. This type of agreement is more commonly referred to as a(n)
interest rate swap.
When fully amortizing loans call for equal periodic payments over the life of the loan they are known as
level-payment mortgages.
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.
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
To put into perspective the amount of residential mortgage debt outstanding, it is useful to compare this market to other prominent sources of available debt. Listing the issuer with the largest amount of debt outstanding first, which of the following choices best depicts the relative rank ordering among the major sources of outstanding debt in the United States as of the end of 2015?
marketable U.S. government bonds, residential mortgage debt, corporate bonds, consumer credit
The use of a mezzanine loan in the purchase of a commercial property has all of the following impacts on the borrower except
mitigates the risk of financing for the borrower.
In the modern framework of home mortgage lending, there are four channels by which first mortgage home loans are created. Within which of the following channels would you typically find a Wall Street investment bank obtaining loans, pooling loans, and creating a senior-subordinate security structure?
nonconforming conventional loan securitization
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
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.
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 he or she produces 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.
One reason why adjustable rate mortgages (ARMs) have become popular has to do with the impact that they have on the interest rate risk that is borne by the parties involved. If interest rates were to rise on a level-payment mortgage (LPM), the interest rate risk of the loan would typically be borne by
the lender only.
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.
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
the loan does not require verification of underwriting information from third-party records.
The use of financial leverage by real estate investors can be a double-edged sword. All of the following statements regarding the use of financial leverage by real estate investors are true except
the use of financial leverage reduces the real estate investor's exposure to default risk.
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
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.
