re finance
Which of the following type of real estate investment is typically considered the most risky?
"Raw" land held for development
The most common loan term of those listed below on fixed-rate commercial mortgages is ______ years.
10
All else being equal, which of the following balloon mortgages minimizes the lender's interest rate risk?
10-year loan
At any point in time, which of the following ARM products typically has the highest effective borrowing cost, all else equal?
10/1
Tom is developing an apartment building in downtown Boston. He requires an 20% going-in IRR on equity on the expected 20-year investment. The current 20-year Treasury bond (T-bond) yield is 3%. What is the risk premium on Tom's investment?
17%
______ year mortgages are a common form of LPM, but ______ year mortgages are also popular.
30, 15
The ______ ARM has become the most popular ARM product in recent years.
5/1
In recent years, lenders have been unwilling to relieve borrowers from personal liability in the event of fraud, environmental problems, or unpaid property tax obligations. A clause that holds the actual borrower liable in such instances is commonly referred to as:
A bad boy clause
Which of the following items are typically included in the lender's due diligence of the loan application?
A careful examination of the in-place leases A request for environmental reports An analysis of the property's income-generating ability
Which of the following statements about Fannie Mae and Freddie Mac are NOT true?
A plan to take Freddie and Fannie private has been approved by the U.S. Congress
Which of the following characteristics distinguish APR from EBC?
APR ignores appraisal fees. APR assumes no prepayment.
Which of the following descriptions of a correspondent relationship is correct?
Commercial mortgage brokers charge a fee for their service. Mortgage brokers help to mitigate the information asymmetry between borrowers and lenders
With an interest-only mortgage, the balance of the loan ______ over time.
Constant
Which of the following statements about the debt yield ratio (DYR) are correct?
DYR is not affected by the interest rate or the amortization period of a loan. DYR indicates the lender's cash-on-cash return on its invested capital if it took over ownership of the property
All else equal, when the DCR ratio increases, the likelihood of default by the borrower ______.
Decreases
As the use of financial leverage increases, the probability that the property will be "cash flowing" ______
Decreases
The yields on commercial mortgages have been approximately 2 percentage points higher, on average, than the yields on comparable maturity Treasury securities over the past 20-plus years. This lending spread primarily represents compensation to the lender for expected:
Default risk
Which of the following types of risk is typically the most relevant to commercial mortgage lenders?
Default risk
Which of the following statements about defeasance clauses are correct?
Defeasance clauses eliminate the borrower's interest savings associated with mortgage prepayment.
When the loan is closed, the borrower must pay a number of up-front financing costs. All of these costs (fees) should always be included in the calculation of lender's yield.
FALSE Reason: Although the borrower pays these costs, the lender does not necessarily receive all of them as income.
True or false: The borrower may be required to deposit a specific amount for legal fees and required third-party reports. These deposits are refundable if the lender decides not to fund the loan.
FALSE: Reason: Such deposits are nonrefundable regardless of whether the lender's commitment is accepted by the borrower.
When a lender forecloses on a mortgage loan, the ______ lien holder is entitled to the foreclosure sales proceeds before the ______ mortgage holder receives any of the proceeds from sale.
First, second
Which of the following statements about Fannie Mae and Freddie Mac ARE true?
Freddie and Fannie are active participants in the multifamily mortgage market. Freddie and Fannie remain in the conservatorship of the federal government
Which of the following options are the main repayment mechanisms used in long-term commercial mortgages?
Fully amortizing loans Partially amortizing loans Interest-only loans
Which of the following statements about HUD are correct?
HUD provides guarantees to lenders for loans used by borrowers to refinance qualified low-income properties. HUD provides guarantees to lenders for loans used by borrowers to purchase qualified low-income properties. HUD initiatives include programs that finance rental housing for the elderly.
The ARM market was first developed in the early 1980s in response to ______ interest rates.
High and volatile
Which of the following describes an early payment mortgage?
In any month, the borrower makes a principal payment that is larger than the scheduled principal payment
Of the following, which is the primary risk that a lender reduces their exposure to through the use of a balloon mortgage instead of a fully amortizing mortgage?
Interest rate risk
Which of the following is a characteristic of a mezzanine loan?
It is secured by the borrower's equity interest in the ownership entity.
Which of the following features describe the promissory note used in commercial mortgage financing?
It is usually quite lengthy. It is used to create a legal debt.
Which of the following mortgages typically places more of the interest rate risk to the lender?
LPMs
Which of the following type of loan is used to finance improvements to the land, such as sewers, streets, and utilities?
Land development loan
Which of the following are characteristics of a loan syndication?
Lenders usually provide a larger loan amount, which is often attractive to borrowers. The group of lenders share the risks associated with a large loan.
Under the Real Estate Settlement and Procedures Act (RESPA), which of the following costs should be included in the EBC calculation?
Loan origination fees Discount points Appraisal fee
Interest rates on floating-rate mortgages have typically been tied to the London Interbank Offer Rate (LIBOR). All else being equal, compared to fixed-payment mortgages and from the perspective of the lender, floating-rate mortgages typically have:
Lower interest rate risk but higher default risk
Which of the following loan characteristics must be considered when calculating the EBCs of two ARM products?
Margin, rate caps, initial adjustment period, initial interest rate
Development and construction loans are typically ______ for the lender than permanent mortgages.
More risky
The debt yield ratio is defined as
NOI in the next year divided by the loan amount
Nancy is a rational, financially unconstrained borrower. She is looking for a $100,000 LPM mortgage to finance her purchase of a beach house. Bank of America offers her two options, one with 15-year term and one with a 30-year loan term. Assume no up-front financing costs for both loans. Also assume Nancy would discount all future loan payments at the contract interest rate. Which loan is the least costly and therefore the better choice?
Nancy is always indifferent between the two options: Recall the loan-payment relationship. In the equilibrium, the loan balance always equals to the present value of future payments, regardless of what mortgage interest rate (the opportunity cost) is applied.
ordinary annuity
Ordinary annuity is defined as a fixed amount of money paid or received at the end of every period.
The U.S. Federal Reserve ("The Fed") periodically increases interest rates when the risk of an overheated economy is perceived. Rate hikes are viewed as bad for real estate investors because the present value of future cash flows is inversely related to the magnitude of the interest rate used for discounting.
Reason: If a real estate investment is expected to produce a fixed set of cash flows, and the required rate of return surges because of the rate hikes, the present value of the investment will decline.
An advantage to the borrower of using a mortgage broker is that the broker will generally obtain quotes from multiple lenders.
Reason: Mortgage brokers help borrowers and lenders find each other.
Which of the following characteristics describe(s) the type of properties that are the focus of the quarterly RERC survey?
Relatively new Market values greater than $10 million
Future benefits are discounted because of
Risk: The outcomes may vary from what was expected when the investment decision was made. Opportunity cost: There is a cost associated with the abandonment of second-best opportunity.
Arbitrage means taking advantage of temporary differences in market prices to make a profit. Assume two real estate companies, A and B, both operate in New York area and focus on office properties. You have determined that Company A's shares have an intrinsic value of $20 per share but are trading at $22 per share, while Company B's shares are worth $25 per share but are trading at $22 per share. What would a rational investor (or an arbitrageur) do to take advantage of this price difference (no short-selling constraint and transaction fee)?
Sell short company A's shares, buy the same number of company B's shares.
Bridge loans typically have loan terms that are ______ conventional loans.
Shorter than
Larger loans typically have contract interest rates that are ______ the rates on smaller loans.
Slightly lower than
A borrower is choosing between a 15-year $100,000 mortgage and a 30-year $100,000 mortgage. Assume both would have the same contract interest rate and no up-front financing costs would be associated with either loan. If both loans remain outstanding until they are fully amortized, on which loan would more interest be paid?
The 30-year mortgage
annuity
The cash flows for an annuity due must all occur at the beginning of each period.
Which of the following characteristics are associated with fully amortizing, level-payment mortgages?
The periodic payments are constant over time.
timelines
Timelines can be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly.
Which of the following investments is generally considered the least risky?
U.S. Treasury securities
The interest rate on ARMs originated by federally insured U.S. banks must be tied to a public index that is not controlled by the lender. The most common ARM indexes in the home loan market track interest rates on
US Treasury securities
When is a borrower likely to purchase a rate lock agreement on the loan before its closing?
When interest rates are likely to increase after the loan commitment is made but before closing
Assume an investment is expected to be worth $10,000 at the end of ten years and that you expect to earn 10% (annually) on investments of similar risk. The present value of this investment opportunity to you is therefore $3,855. Which of the following is true?
You're happy to pay $3,000 for this investment today. If you invested $3,000 for 10 yrs. at 10% you wouldn't accumulate $10,000 at the end of 10 yrs.
The balance of a partially amortizing mortgage loan at loan maturity is not zero and is typically satisfied with:
a balloon payment
The most common type of single-family home mortgage loan is?
a fixed-rate, level-payment, fully amortizing loan.
Prepayment penalties are typically expressed as
a percentage of the remaining mortgage balance
Potential outcomes of the lender's discovery of inconsistencies or errors in the loan submission package include:
a reduction in the loan amount a refusal to fund the loan an alteration of the loan terms
The due diligence process normally occurs
after the signing of the loan application
With a balloon mortgage, the remaining mortgage balance at the end of the loan term must be satisfied by the borrower. The borrower's options do NOT include
allowing a different investor to assume the loan
When you invest in a risky investment, you should expect to earn:
at least what you could earn on an alternative investment of equal risk
A primary reason why ARM interest rates are typically lower than those on otherwise comparable LPMs is because
borrowers and lenders share the interest rate risk
Which of the following lenders is more likely to require some from of credit enhancement on a commercial real estate loan?
commercial banks
Calculation of the expected future value of a house in 5 years growing at an expected rate is called
compounding
As the opportunity cost of waiting for future cash flows increases, the present value of those future cash flows
decreases
Holding constant the contract interest rate and the number of discount points, the borrower's effective borrowing cost ______ as the expected number of years the loan is outstanding ______.
decreases, increases
The internal rate of return (IRR) is the discount rate that makes the present value of cash inflows from a particular investment equal to the present value of the cash outflows.
definition of IRR
Mortgage brokers
get paid a fee for helping borrowers and lenders find each other.
An investment is expected to be wealth increasing if the NPV is ______ zero.
greater than
In recent years, spreads on bridge loans, relative to Treasury securities,
have been declining
The compounding of interest causes the value of an investment to grow at a(n) ____ rate.
increasing
Typically, financial leverage alters the risk-return relationship of real estate investments by:
increasing default risk. increasing the expected IRR on equity.
No principal reduction occurs from one month to the next with
interest-only mortgages
The "total" yield on an investment opportunity
is equal to current yield plus the appreciation yield
A rate lock agreement:
is purchased by the borrower for the benefit of the borrower may result in a lower contract interest rate than if the rate is not locked
In addition to discount points, home mortgage borrowers usually pay which of the following as up-front financing costs?
loan application and document preparation fee a loan origination fee title insurance
The ______ the LTV, the lower is the likelihood of default, all else equal.
lower
The use of financial leverage amplifies the expected IRR on investors' equity. This _________ of equity returns is known as financial leverage.
magnification
Relative to conventional mortgages, bridge loans are ______ from the lender's perspective and therefore carry ______ contract interest rates.
more risky, higher
The majority of bridge loan financing is provided by ______.
non-traditional lenders
As required by Federal Reserve Regulation Z, which of the following characteristics must be accounted for when calculating APR?
origination fees discount points
The maximum amount the lender should be willing to lend today should be equal to the ______ of the expected mortgage payments, discounted at the ______.
present value, lender's opportunity cost
Which of the following type of real estate investment is the generally considered the least risky?
properties net leased to a high quality tenant
When mortgage lenders have access to other borrower assets in situations where the foreclosure sale price is less than the total amount owed the lender, we commonly refer to this type of loan as a
recourse loan
In competitive mortgage markets, lenders must ______ the contract interest rate in exchange for ______ up-front financing costs such as discount points.
reduce, more
Lockout provisions/clauses in commercial mortgage ______ the lenders' ______.
reduce, reinvestment risk
Reducing the term of a fixed rate mortgage from 30 years to 10 years but keeping a 30-year amortization schedule:
reduces the lender's interest rate risk
If the (going-in) IRR exceeds the investor's required rate of return, the investor
should accept the investment if she has the required equity investment available
Cost associated with obtaining ownership of the property
should not be included in the EBC calculation
In commercial mortgage financing, a note contains the terms of the loan and provisions agreed to by the borrower and lender. Typically, the provisions of the promissory note cover matters such as
the amounts and timing of periodic payments the borrower's responsibility for maintenance of the property the penalties for late payments what happens if the borrower defaults
When the contract interest rate is not locked via a rate lock agreement
the borrower and lender will usually agree to a fixed spread over the benchmark interest rate (such as the yield on 10-year Treasury securities)
The "price" of purchasing higher expected returns with more financial leverage is
the increased variability of the return on equity
Borrowers typically get to choose the number of discount points they pay but not the loan origination fee.
the loan origination fee for home loans is typically 1% of the loan amount, regardless of the number of discount points
The true (or realized) effective borrowing cost for an ARM is more difficult to predict than the EBC for a level-payment mortgage because:
the mortgage payments and the holding period are uncertain.
On a fixed-rate, level payment mortgage, the present value of the remaining payments at any point in time is equal to
the present value of the remaining payments discounted at the contract rate of interest
Relative to home loan underwriting, the underwriting of commercial real estate loans is more focused on:
the property pledged as collateral for the loan
As the perceived risk of expected future cash flows increases,
the required (expected) return should increase
All else equal, an increase in up-front financing costs has a larger impact on the effective borrowing cost
the shorter is the expected holding period
Borrowers with negative equity often continue to make mortgage payments because:
they are waiting for the value of their property to increase
In the real estate appraisal business, the IRR is often referred to as the
total yield
In order to have positive financial leverage when a second mortgage or mezzanine loan is used, the ______ property return (cap rate) must be greater than the ______.
unlevered, weighted average cost of debt
Holding the contract interest rate constant, the effective borrowing cost increases as ______.
up-front financing costs increase
Land acquisition, development, and construction loans:
usually have floating interest rates are usually prepayable at anytime without penalty
Timelines are useful because they allow us to ______ the time pattern of money returns.
visualize
