Real Estate Chapter 11

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)?

$1177

Loan servicing includes a number of responsibilities such as collecting monthly mortgage payments from the borrower, remitting principal and interest payments to investors, ensuring sufficient escrow payments are being made by the borrower, and managing default if it should arise. In exchange for these services, mortgage bankers receive a fee. If the outstanding loan balance is $250,000 and the annual servicing fee is 0.35%, what is the monthly fee for servicing the loan?

$72.92

When the mortgage banker originates a home loan, she actually creates two assets: the loan and the servicing rights. Servicing fees typically range from:

0.19-0.44 percent of the outstanding loan balance.

Utilizing the following information, calculate the housing expense ratio. Monthly Principal and interest on mortgage loan: $635 Monthly Tax and insurance payments into escrow: $125 Gross monthly income: $2,500

30.4%

In ascertaining whether a borrower has the ability to pay off his loan over time, a mortgage bank may rely on calculating a total debt ratio as part of its underwriting process. Utilizing the following information, calculate the total debt ratio. Monthly principal and interest on mortgage loan: $635 Monthly Tax and insurance payments into escrow: $125 Monthly Car lease payment (lease term is 3 years): $350 Gross monthly income: $2,500

44.4%

A lender is considering whether to approve a mortgage loan on a home recently appraised at a value of $500,000. If the borrower is willing to make a down payment of $100,000, determine the loan-to-value ratio associated with this property.

80%

When a mortgage is used as collateral for the issuance of a mortgage-backed security (MBS), the underlying mortgage is said to be "securitized." Approximately what percentage of conventional conforming and FHA or VA loans in the U.S. are being sold into the secondary market and being used as collateral for the issuance of MBS?

90%

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.

In 1989, Congress took major steps to establish depository institution accountability by requiring these institutions to hold more capital as they take on riskier assets. Which of the following Congressional acts imposed these capital standards on depository institutions?

Financial Institutions Reform, Recovery, and Enforcement Act

In the late 1960's, Congress created a number of agencies designed to address a struggling secondary market for residential mortgages. Which of the following organizations was developed primarily to guarantee mortgage-backed securities based on pools of FHA, VA and Rural Housing Service loans, rather than issue, buy or sell mortgages?

Government National Mortgage Association (Ginnie Mae)

Let's suppose that a lender has established a 90 percent 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 percent.

The traditional approach to loan underwriting has virtually been replaced by an automated underwriting process that involves a statistically derived equation to determine the level of default risk associated with a loan application. All of the following statements regarding the automated underwriting process are true EXCEPT:

The marginal cost per loan underwritten using the automated process is greater than the case of traditional underwriting.

The Dodd-Frank Act ushered in a new standard for home mortgage underwriting. Which of the following standards is now required of any lender when underwriting a home loan?

ability-to-repay standard

Traditional home mortgage underwriting is said to rest on three elements, the "three C's." The debt-to-income ratio is one tool that lenders will use to address concerns associated with which of the "three C's?"

capacity

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

In the securitization process, mortgages are pooled together and cash flows are packaged into securities to be sold in the secondary market. Agencies and private companies that pool mortgages and sell mortgage-backed securities (MBS) are often referred to as:

conduits.

In the early 1970's, home mortgage lenders were predominantly depository institutions. By the end of the decade, the growth of deposits at these institutions became negative due to the emergence of more attractive investment opportunities such as money market funds. This change in the distribution chain of funds is more commonly referred to as:

disintermediation.

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

Recently, mortgage banking has become the natural method for doing mortgage lending. Within the mortgage lending process, which of the following roles serves as the primary revenue source for mortgage banks?

loan servicing

Throughout the process of originating and selling mortgages, mortgage companies face a number of risks. Therefore, it is important for a lending institution to evaluate the risks of mortgage loan default through a process commonly referred to as:

loan underwriting.

In the process of deciding whether to extend a mortgage loan to a prospective borrower, lenders typically examine three elements, more commonly referred to as the "3 C's." Which of the following metrics does a bank use to evaluate the collateral piece of the loan agreement?

loan-to-value ratio

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 amongst the major sources of outstanding debt in the U.S. as of the end of 2018?

marketable U.S. government bonds, residential mortgage debt, corporate bonds, consumer credit

The emergence of mortgage securities propelled the development of mortgage companies, an entity significantly different from the thrifts and banks that previously dominated the mortgage landscape. Which of the following parties is responsible for providing mortgage origination services and initial funding within this new framework?

mortgage banker

Mortgage banks typically will attempt to sell loans as quickly as possible after they are originated by either issuing mortgage securities or selling the loan to an intermediary that will subsequently sell the loan in the secondary market. The period between loan commitment and loan sale is referred to as the:

mortgage pipeline.

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

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 borrowers with a credit score above 660 are more commonly referred to as:

prime borrowers.

As of the end of 2018, which of the following types of mortgage loans accounts for the greatest percentage of mortgage debt outstanding?

residential (1-4 family)

Despite many innovations in the lending process that made mortgage loans more accessible and affordable to the general public, many potential borrowers faced considerable barriers in qualifying for a loan and making a down payment. Which of the following types of loans was designed for a borrower with weak credit, those who seek 100 percent financing, or who cannot document their income?

subprime mortgage loan

In the early 1970's, home mortgage lenders were predominantly depository institutions focused on collecting local savings deposits and using these funds to make local mortgage loans. The savings institutions of this era of mortgage financing are more commonly referred to as:

thrift

Which of the following entities is a primary example of a portfolio lender?

thrift

In addition to providing home mortgages, large commercial banks have specialized in providing short-term funds to mortgage banking companies in order to enable them to originate mortgage loans and hold the loans until the mortgage banking company can sell them in the secondary market. This type of financing is commonly referred to as:

warehousing.