{Real Estate} Chapter 15 - Mortgage Calculations and Decisions and Real and Chapter 16 - Commercial Mortgage Types and Decisions
Given the following information for a 30-year, $180,000 ARM loan, what is the remaining mortgage balance at the end of year 3: Margin, 3%, index for the beginning of year 2, 3%; Index for the beginning of year 3, 5%; teaser, 6%. Assume no cap.
$173,693.42
Assume you want to purchase a 100,000 square feet office property in downtown Baltimore. You are required by your lender to set aside $0.50 per square foot per year (end of each year) for nonrecurring capital expenditures. Suppose the deposit rate is 2% and compounding frequency is annual. How much would you accumulate by the end of year 5?
$260,202.01
Suppose Howard Realty Group prepaid a 10-year, 6% commercial mortgage loan at the end of three years without penalty. The original loan amount was $500,000. The loan was being amortized with monthly payments and a 30 year amortization schedule. The remaining balance at the end of 3 years was _________________.
$480,420
Given the following information on a monthly payment mortgage, calculate the level monthly mortgage payment. loan amount: $56,000; loan term: 15 years; (annual) contract interest rate: 7.5%.
$519.13
Assume a $100,000 ARM with 30-year (monthly payments) maturity and an initial rate of 6%. The interest rates is to remain fixed for the first 5 years. If the ARM rate rises to 6.5% at the beginning of year 6 (end of year 5), what is the new payment in year 6? (round to the nearest cent)
$628.31
Assume a $100,000 ARM with 30-year (monthly payments) maturity and an initial rate of 6%. The interest rates remains fixed at 6% for the first three years. If the ARM rate rises to 6.5% at the beginning of year 4 (end of year 3), what is the new payment in year 4? (round to the nearest cent)
$629.88
Given the following, calculate the balloon payment for a partially amortized loan. Loan amount: $84,000; Term to maturity: 7 years; Amortization term: 30 years; Interest rate: 4.5%; Monthly payment: $425.62
$73,102
Assume you have obtained an interest-only mortgage. The loan amount is $300,000, payments will be made monthly, the (annual) interest rate is 4%, and the loan term is 30 years. What is the monthly payment?
1,000
Susan is considering buying a class-A office building in Miami. The acquisition price is $2,500,000. She expects the first-year potential gross income (PGI) to be $300,000. Based on her pro forma analysis, vacancy and collection losses comprise 5% of PGI, and operating expenses and capital expenditures will consume 40% of EGI. The interest rate on her commercial mortgage is 6%, with monthly payments and 25-year amortization schedule. If the lender requires the DCR to be 1.35 or greater, what is the maximum loan amount?
1,638,294.68
Susan is considering to buying a class-A office building in Miami. The acquisition price is $2,500,000. She expects the first-year potential gross income (PGI) to be $300,000. Based on her pro forma analysis, vacancy and collection losses comprise 5% of PGI, and operating expenses and capital expenditures are expected to consume 40% of EGI. The interest rate on her commercial mortgage is 6%, with monthly payments and 25-year amortization schedule. If the lender requires the DYR to be 10% or greater, what is the maximum loan amount?
1,710,000
A multifamily property is acquired at a price of $1,000,000. The loan amount is $750,000. The property's first-year pro forma is as follows: NOI: $75,000, operating expenses: $30,000; capital expenditures: $0, and annual debt service: $60,000. What is the estimated DCR?
1.25
Lucy is considering acquiring an office property in Orlando. The estimates for the first year pro forma are: potential gross income: $300,000; annual debt service: $115,000; vacancy and collection losses: $60,000; operating expenses: $56,000; capital expenditures, $0. What is the DCR?
1.6
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
A multifamily property is acquired at a price of $1,000,000. The loan amount is $750,000. The property's first-year pro forma is as follows: NOI, $75,000, operating expenses, $30,000, capital expenditures, $0. Annual debt service, $60,000. What is the estimated debt yield ratio?
10.0%
Assume a $100,000 monthly payment mortgage loan with 30-year term. The lender is charging an annual interest rate of 10% and two discount points at origination. Up-front financing costs paid to third parties total $1,000. Assuming the mortgage is held outstanding by the borrower for the full 30 years, the lender's yield is ________ percent. (round to two decimal places)
10.37%
Assume a $100,000 mortgage loan with 30-year term. The lender is charging an annual interest rate of 10% and two discount points at origination. Up-front financing costs paid to third parties equal $1,000. Assuming the mortgage is held for five years and then prepaid, what is the lender's yield on the loan?
10.37%
Assume a $100,000 monthly payment mortgage loan with 30-year term. The lender is charging an annual interest rate of 10% and two discount points at origination. Up-front financing costs paid to third parties total $1,000. Assuming the mortgage is held for five years and then prepaid, what is the EBC on this mortgage?
10.79%
At any point in time, which of the following ARM products typically has the highest effective borrowing cost, all else equal?
10/1 ARMs
Given the following information, calculate the effective borrowing cost. Loan amount: $300,000, Term: 30 years, Interest rate: 12%, Discount points: 2, Other up-front costs to close the mortgage not paid to the lender: $4,000. Assume monthly payments and that the borrower does not prepay the loan prior to maturity.
12.46%
All else equal, _____ year level-payment mortgages typically have lower contract interest rates than _______ year level-payment mortgages.
15, 30
Debbie qualifies to borrow $250,000 on a mortgage at 6% for 30 years with monthly payments. Based on this information, determine the remaining loan balance at at the end of year three (round to the nearest cent).
240210.18
At any point in time, which of the following ARM products typically has the lowest effective borrowing cost, all else equal?
3/1 ARMs
________ 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
Assume the following information for a 30-year, $180,000 ARM loan: margin: 3% (300 basis points); index rate at the beginning of year 2: 3%; initial interest (teaser rate): 4.5%; no periodic cap. What is the contract interest rate at the beginning of year 2?
6.0%
A loan for $250,000 is made for 15 years at 6% annual interest. The lender and borrower agree that payments will be made monthly. Assuming three discount points are charged by the lender and the borrower will keep the loan outstanding to maturity, what will be the lender's yield?
6.48%
For a $300,000 loan at a 12% annual interest rate with a 30-year amortization period, how many discount points would the lender have to charge to increase the lenders' yield to 13%? Assume monthly payments and no prepayment of the mortgage by the borrower prior to maturity.
7.01
Ace Realty Trust LLC is considering a purchase of a shopping mall for $1,200,000. If ACE contributes $300,000 in equity and finances the rest with a commercial mortgage loan, what is the initial LTV?
75%
Determine the level monthly payment for the following mortgage: $90,000, 30 years, 10% annual interest rate. Payment is $ ____. (Round to the nearest cent)
789.81
Assume a $250,000 mortgage loan with 15-year term. The lender is charging an annual interest rate of 8% and three discount points at origination. Other up-front financing costs paid to other service providers (i.e., not the lender) total $1,000. What is the lender's yield on the loan? Assume monthly payments and no prepayment prior to loan maturity.
8.51%
Which of the following statements about Fannie Mae and Freddie Mac are NOT true? Freddie and Fannie remain in the conservatorship of the federal government Freddie and Fannie are no longer active participants in the multifamily mortgage market. A pan to take Freddie and Fannie private has been approved by the U.S. Congress
A pan to take Freddie and Fannie private has been approved by the U.S. Congress
Which of the following characteristics distinguish APR from EBC? (check all the correct answers)
APR ignores appraisal fees. APR assumes no prepayment.
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.
Blank 1: first Blank 2: second
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
Which of the following types of risk is typically the most relevant to commercial mortgage lenders? Multiple choice question. Reinvestment risk Prepayment risk Interest rate risk Default risk
Default risk
Which of the following statements about defeasance clauses are correct? Defeasance clauses eliminate the borrower's interest savings associated with mortgage prepayment. With defeasance clauses, a borrower who prepays must purchase a set of municipal bonds for the lender. Defeasance clauses prohibit borrowers from prepaying. A defeasance clause is typically less costly to borrowers than a yield-maintenance agreement.
Defeasance clauses eliminate the borrower's interest savings associated with mortgage prepayment.
As required by Federal Reserve Regulation Z, which of the following characteristics must be accounted for when calculating APR?
Discount points Origination fees
HUD actively participates in the mortgage market by issuing loan guarantees for multifamily mortgages through (enter the acronym).
FHA
True or false: "Good faith" deposits are always nonrefundable.
False
True or false: At the maturity of a partially amortizing loan, the borrower must sell the property and use the sale proceeds to pay of the lender.
False
True or false: Borrowers who expect to keep the loan outstanding for a short period of time should generally choose to pay discount points to buy down the interest rate.
False
True or false: Commercial mortgage borrowers typically default when their equity in the property is negative.
False
True or false: Federal law requires that home loans have 30-year or 15-year terms/maturities.
False
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
True or false: 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
Which of the following statements about HUD are correct? -HUD provides guarantees to lenders for loans used by borrowers to purchase qualified low-income properties. -HUD provides guarantees to lenders for loans used by borrowers to refinance qualified low-income properties. -HUD prohibits local housing authorities from subsidizing the rent payments of low-income households. -HUD initiatives include programs that finance rental housing for the elderly.
HUD provides guarantees to lenders for loans used by borrowers to purchase qualified low-income properties. HUD provides guarantees to lenders for loans used by borrowers to refinance qualified low-income properties. HUD initiatives include programs that finance rental housing for the elderly.
Which of the following describes an early payment mortgage? The borrower pays off the loan completely with one extra principal payment prior to loan maturity. The borrower makes her monthly payment a few days before the due date. In any month, the borrower makes a principal payment that is larger than the scheduled principal payment
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? -Failure to make payments on the mezzanine loan can lead to foreclosure on the borrower's property. -It is secured by the borrower's equity interest in the ownership entity. -It is secured by the borrower's pledge of the property as a collateral.
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 used to create a legal debt. It is usually quite lengthy.
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 participation loan? The interest rate is generally lower than alternative commercial mortgages. Lender receives a specified portion of a property's cash flows. Lender usually provides a larger loan amount, which is often attractive to borrowers. Lender usually provides a smaller loan amount.
Lender receives a specified portion of a property's cash flows. Lender usually provides a larger loan amount, which is often attractive to borrowers.
Under the Real Estate Settlement and Procedures Act (RESPA), which of the following costs should be included in the EBC calculation?
Loan origination fees Appraisal fee Discount points
Which of the following statements about lockout provisions are correct? Most fixed-rate commercial mortgages allow borrowers to freely prepay at par. Lockout provisions reduce borrowers' reinvestment risk. Lockout provisions reduce lenders' interest rate risk. Lockout provisions reduce lenders' reinvestment risk.
Lockout provisions reduce lenders' reinvestment risk.
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: higher interest rate risk but lower default risk Lower interest rate risk and lower default risk Lower interest rate risk but higher default risk higher interest rate risk and higher default risk
Lower interest rate risk but higher default risk
Which of the following descriptions of a correspondent relationship is correct?
Mortgage brokers help to mitigate the information asymmetry between borrowers and lenders. Commercial mortgage brokers charge a fee for their service.
A property investment is said to be "cash flowing" when:
NOI exceeds required mortgage payments
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.
Which of the following options are the main repayment mechanisms used in long-term commercial mortgages?
Partially amortizing loans Interest-only loans Fully amortizing loans
For how many years will the contract interest rate be fixed with a 7/1 adjustable-rate mortgage (ARM)?
Seven years
Which of the following are usually contained in a commercial mortgage loan submission package?
Size of property pledged as collateral Requested loan amount
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
Which of the following are characteristics of a loan syndication? Multiple select question. Lenders usually provides a larger loan amount, which is often attractive to borrowers. Lender usually provides a smaller loan amount. The group of lenders share the risks associated with a large loan. Lender usually provides a larger loan amount, which is often attractive to borrowers.
The group of lenders share the risks associated with a large loan. Lender usually provides a larger loan amount, which is often attractive to borrowers
Which of the following characteristics are associated with fully amortizing, level-payment mortgages?
The periodic payments are constant over time.
True or false: An advantage to the borrower of using a mortgage broker is that the broker will generally obtain quotes from multiple lenders.
True
True or false: Borrowers who expect to keep the loan outstanding for a long period of time should generally consider paying discount points to buy down the interest rate.
True
True or false: When a property is sold before the loan term ends, commercial mortgages do not allow transfer of the mortgage liability from the original borrower to the buyer of the property without the approval of the lender.
True
True or false: borrowers typically get to choose the number of discount points they pay but not the loan origination fee.
True
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
Financial leverage is frequently used in commercial real estate investments. Which of the following statements about financial leverage are correct?
With respect to the IRR, positive financial leverage occurs when the cost of borrowing is less than the unlevered IRR. Financial leverage is used by some investors because of limited financial resources (savings).
Which of the following clauses or provisions provide commercial mortgage borrowers the ability to prepay the loan, but at a cost to the borrower? Yield-maintenance agreements Prepayment penalties Escrow clauses Lockout provisions
Yield-maintenance agreements Prepayment penalties
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
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: Multiple choice question. a credit enhancement provision a lockout provision a bad boy clause
a bad boy clause
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
Which of the following loan characteristics must be considered when calculating the EBCs of two ARM products? all of the characteristics must be considered margin initial adjustment period initial interest rate rate caps
all of the characteristics must be considered
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 Multiple choice question. selling the property and using the sale proceeds to pay off the remaining debt refinancing the remaining balance with the original lender at the current interest and current terms refinancing the remaining balance with a new lender at the current interest rate and current terms allowing a different investor to assume the loan
allowing a different investor to assume the loan
Land acquisition, development, and construction loans:
are usually prepayable at anytime without penalty usually have floating interest rates
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
A borrower can increase his or her financial leverage by applying for a second mortgage, which is secured by the borrower's pledge of the property __________ as for the loan.
collateral
Which of the following lenders is more likely to require some form of credit enhancement on a commercial real estate loan? pension funds Fannie Mae commercial banks life insurance companies
commercial banks
Which of the following lenders is more likely to require some from of credit enhancement on a commercial real estate loan?
commercial banks
All else being equal, floating-rate mortgages ______ the lender's interest rate risk.
decrease
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
Borrowers with negative equity often continue to make mortgage payments because:
default is very costly
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
With a participation mortgage, the lender participates in cash flows that are generally received only by the:
equity investor
Assume the "capital stack" of an investment includes the sponsor's equity, "preferred" equity, a first mortgage, and a second mortgage. In the event of default and foreclosure, in what "pecking order" will any cash flow available from the foreclosure sale of the property be distributed?
first lender, second lender, preferred equity, sponsor equity
Mortgage brokers -are allowed to a have a correspondent relationship with only one lender -are not allowed to help borrowers assemble their loan submission package -actually provide the capital to fund the loan -get paid a fee for helping borrowers and lenders find each other.
get paid a fee for helping borrowers and lenders find each other.
In recent years, spreads on bridge loans, relative to Treasury securities,
have been declining
The ARM market was first developed in the early 1980s in response to ________ interest rates.
high and volatile
A borrower should consider making extra principal payments on a level-payment mortgage (assuming they are allowed)
if the dollar amount of those extra payments could not be invested at a higher return than the interest rate on the loan.
Payments on commercial mortgage loans are expected to come primarily from:
income generated by the property pledged as collateral
Payments on commercial mortgage loans are expected to come primarily from: Multiple choice question. income generated by the property pledged as collateral the personal income of the mortgage broker the personal income of the borrower income generated by the property owner's Treasury bond investments
income generated by the property pledged as collateral
A traditional second mortgage, which is subordinate to the secured first mortgage in the event of default and foreclosure, usually ________ the expected return on equity, but also ________ the risk of default.
increases, increases
Typically, financial leverage alters the risk-return relationship of real estate investments by:
increasing the expected IRR on equity. increasing default risk.
No principal reduction occurs from one month to the next with
interest-only mortgages
With an interest-only mortgage, the balance of the loan ______ over time.
is constant
Due-on-sale clauses primarily protect the ______.
lender
On a partially amortizing loan, monthly payments are based on an amortization term that is ______ the actual term of the mortgage loan.
longer than
Recently, loans on retail properties have been associated with higher delinquency rates. Assuming this trend is going to continue in the near future, lenders will likely to require _____ LTVs on such loans.
lower
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
A rate lock agreement:
may result in a lower contract interest rate than if the rate is not locked is purchased by the borrower for the benefit of the borrower
Development and construction loans are typically ________ for the lender than permanent mortgages.
more risky
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
Typically, a lockout provision is adopted to ________ prepayment of the remaining mortgage balance for a certain period of time. Multiple choice question. prohibit allow
prohibit
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
Lockout provisions, defeasance clauses, prepayment penalties, and yield-maintenance agreement are employed to restrict borrower's prepayment when mortgage rates are declining. They all reduce the lender's _________.
reinvestment risk
The contract interest rate on floating rate commercial real estate loans is typically tied to movements in
short-term interest rates
Cost associated with obtaining ownership of the property
should not be included in the EBC calculation
Larger loans typically have contract interest rates that are ___________ the rates on smaller loans.
slightly lower than
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)
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 Multiple select question. the borrower's responsibility for maintenance of the property the property pledged as collateral for the loan what happens if the borrower defaults the penalties for late payments the amounts and timing of periodic payments
the borrower's responsibility for maintenance of the property. what happens if the borrower defaults. the penalties for late payments. the amounts and timing of periodic payments.
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
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 penalties for late payments the amounts and timing of periodic payments the borrower's responsibility for maintenance of the property what happens if the borrower defaults
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
Financial risk is the risk that NOI will be insufficient to cover the mortgage payment obligation. Therefore, financial risk is most closely linked to:
the risk of default
In addition to discount points, home mortgage borrowers usually pay which of the following as up-front financing costs?
title insurance loan application and document preparation fee a loan origination fee
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
