BUS 410 QUIZ QUESTIONS AND CORRECT
DETAILED ANSWERS (VERIFIED ANSWERS) |
ALREADY GRADED A+ | NEW UPDATE 2025
Mortgages - ANSWER loans to individuals or businesses to purchase homes,
land, or other real property
• Four basic types of mortgages are issued by U.S. financial institutions -
ANSWER 1) home mortgages are used to purchase one- to four-family
dwellings (called "single-family mortgages") - 75%
2) multifamily dwellings mortgages are used to purchase apartment complexes,
townhouses, and condominiums - 17%
3) commercial mortgages are used to finance the purchase of real estate for
business purposes - 7%
4) farm mortgages are used to finance the purchase of farms
The key difference between US and Canada - ANSWER interest on mortgages
is tax deductible in the US. - Interest on up to $750,000 of mortgage debt is
deductible.
Mortgage Refinancing (Prepayment) - ANSWER • Mortgage Prepayment
happens when a borrower takes out a new mortgage and uses the proceeds to
pay off an existing mortgage
- mortgages are most often refinanced when an existing mortgage has a higher
interest rate than current rates
,- In Canada, mortgages can be open or closed. Open mortgages allow
prepayments without penalties. Closed mortgages charge steep prepayment
penalties, e.g., an interest rate differential between your mortgage rate and the
current market rate multiplied by the outstanding balance and remaining months
to maturity. If you buy a new house you can port your mortgage to the new
house, avoid the prepayment penalty.
Mortgage types: Interest rates - ANSWER • Fixed-rate mortgages
• Adjustable-rate mortgages
Fixed-rate mortgages - ANSWER lock in the borrower's interest rate
- required monthly payments are fixed over the life of the mortgage.
- lenders assume interest rate risk
Adjustable-rate mortgages - ANSWER (ARMs) tie the borrower's interest rate
to some market interest rate or index
- required monthly payments can change over the life of the mortgage, although
they may initially be fixed for a set time period.
• For example, hybrid ARMs: 5/1 (fixed rate for 5 years, then rate reset every year)
are popular in the US.
- borrowers assume interest rate risk with an ARM
- ARMs can increase default risk
• Canada. All mortgages in Canada are ARMs from the US perspective. - Fixed rate
mortgages: the rate resets only at the end of the term (every 3-10 years, 5yrs
most typical). - Variable rate mortgages: the rate changes any time the prime rate
changes
, Mortgage types - ANSWER • Subprime mortgages
- Subprime mortgages are mortgages whose borrowers do not qualify for a 'prime'
credit rating because of their low FICO credit scores (arising from prior credit
problems, such as delinquencies and defaults; or they may simply lack sufficient
credit history or have insufficient income).
- Beginning in 2006, problems in the subprime mortgage market led to the
financial crisis of 2007 and 2008
• Second mortgage: home equity loan vs. home equity line of credit (HELOC)
- Are similar in that they are loans secured by the property value.
- Second mortgage is a subordinated claim to the first mortgage
- Home equity loan is lump sum vs. HELOC is a line of credit
• Reverse-annuity mortgages (RAMs)
- Retirees or homeowners with a substantial amount of equity in their home can
sell the equity back to a bank, and the bank makes monthly payments over time
Secondary Mortgage Markets and Securitization - ANSWER • FIs remove
mortgages from their balance sheets through one of two mechanisms
- by pooling recently originated mortgages together and selling them in the
secondary market
- by securitizing mortgages (i.e., by issuing securities backed by the mortgages)
- Securitization is a capital market activity in which assets (liabilities) that generate
cash flows are pooled and used to create new, marketable securities.
- In 2007, 40% of mortgages were securitized in the US, only 3% in Canada.
DETAILED ANSWERS (VERIFIED ANSWERS) |
ALREADY GRADED A+ | NEW UPDATE 2025
Mortgages - ANSWER loans to individuals or businesses to purchase homes,
land, or other real property
• Four basic types of mortgages are issued by U.S. financial institutions -
ANSWER 1) home mortgages are used to purchase one- to four-family
dwellings (called "single-family mortgages") - 75%
2) multifamily dwellings mortgages are used to purchase apartment complexes,
townhouses, and condominiums - 17%
3) commercial mortgages are used to finance the purchase of real estate for
business purposes - 7%
4) farm mortgages are used to finance the purchase of farms
The key difference between US and Canada - ANSWER interest on mortgages
is tax deductible in the US. - Interest on up to $750,000 of mortgage debt is
deductible.
Mortgage Refinancing (Prepayment) - ANSWER • Mortgage Prepayment
happens when a borrower takes out a new mortgage and uses the proceeds to
pay off an existing mortgage
- mortgages are most often refinanced when an existing mortgage has a higher
interest rate than current rates
,- In Canada, mortgages can be open or closed. Open mortgages allow
prepayments without penalties. Closed mortgages charge steep prepayment
penalties, e.g., an interest rate differential between your mortgage rate and the
current market rate multiplied by the outstanding balance and remaining months
to maturity. If you buy a new house you can port your mortgage to the new
house, avoid the prepayment penalty.
Mortgage types: Interest rates - ANSWER • Fixed-rate mortgages
• Adjustable-rate mortgages
Fixed-rate mortgages - ANSWER lock in the borrower's interest rate
- required monthly payments are fixed over the life of the mortgage.
- lenders assume interest rate risk
Adjustable-rate mortgages - ANSWER (ARMs) tie the borrower's interest rate
to some market interest rate or index
- required monthly payments can change over the life of the mortgage, although
they may initially be fixed for a set time period.
• For example, hybrid ARMs: 5/1 (fixed rate for 5 years, then rate reset every year)
are popular in the US.
- borrowers assume interest rate risk with an ARM
- ARMs can increase default risk
• Canada. All mortgages in Canada are ARMs from the US perspective. - Fixed rate
mortgages: the rate resets only at the end of the term (every 3-10 years, 5yrs
most typical). - Variable rate mortgages: the rate changes any time the prime rate
changes
, Mortgage types - ANSWER • Subprime mortgages
- Subprime mortgages are mortgages whose borrowers do not qualify for a 'prime'
credit rating because of their low FICO credit scores (arising from prior credit
problems, such as delinquencies and defaults; or they may simply lack sufficient
credit history or have insufficient income).
- Beginning in 2006, problems in the subprime mortgage market led to the
financial crisis of 2007 and 2008
• Second mortgage: home equity loan vs. home equity line of credit (HELOC)
- Are similar in that they are loans secured by the property value.
- Second mortgage is a subordinated claim to the first mortgage
- Home equity loan is lump sum vs. HELOC is a line of credit
• Reverse-annuity mortgages (RAMs)
- Retirees or homeowners with a substantial amount of equity in their home can
sell the equity back to a bank, and the bank makes monthly payments over time
Secondary Mortgage Markets and Securitization - ANSWER • FIs remove
mortgages from their balance sheets through one of two mechanisms
- by pooling recently originated mortgages together and selling them in the
secondary market
- by securitizing mortgages (i.e., by issuing securities backed by the mortgages)
- Securitization is a capital market activity in which assets (liabilities) that generate
cash flows are pooled and used to create new, marketable securities.
- In 2007, 40% of mortgages were securitized in the US, only 3% in Canada.
