Principles of Real Estate Exam #1
Questions with Answers
Which of the following statements are true about Direct Participation Programs (DPPs) and Real
Estate Investment Trusts (REITs) in the U.S.? Select all that apply.
a. DPPs and REITs do not pay corporate profits tax.
b. REITs can be set up for all kinds of purposes, e.g. a financial advising company or a coal mine
can have the legal form of a REIT.
c. No investor in a DPP is protected by limited liability.
d. Because DPPs were not accessible for small investors, the U.S. Congress created the legal
framework for REITs in 1960. - ✔✔a. DPPs and REITs do not pay corporate profits tax.
d. Because DPPs were not accessible for small investors, the U.S. Congress created the legal
framework for REITs in 1960.
What is a balloon payment mortgage, as defined in Prof. Shiller's lecture?
a. It is a mortgage contract, in which the monthly payments consist of an interest component
and a principal repayment component, so that the mortgage balance, i.e. the remaining
principal, at the maturity date is equal to zero.
b. Mortgages that will subsequently be guaranteed by either Fannie Mae or Freddie Mac are
referred to as balloon payment mortgages.
c. It is a mortgage contract, where you only pay interest during the course of the contract and
repay the entire mortgage principal as a balloon-payment at the maturity date of the contract
d. It is a mortgage specifically suited for the financing of buildings that are used by the
ballooning industry. - ✔✔c. It is a mortgage contract, where you only pay interest during the
course of the contract and repay the entire mortgage principal as a balloon-payment at the
maturity date of the contract
,Consider a level payment, fixed rate, fully amortizing mortgage. What happens to the total
monthly payment and the interest payment component of the monthly payment, as the
mortgage contract gets closer to the maturity date?
a. The total monthly mortgage payment remains constant and the interest payment component
decreases.
b. The total monthly mortgage payment and the interest payment component increase.
c. The total monthly mortgage payment and the interest payment component decrease.
d. The total monthly mortgage payment remains constant and the interest payment component
increases. - ✔✔a. The total monthly mortgage payment remains constant and the interest
payment component decreases.
Which of the following statements are true with respect to the two U.S. Government
Sponsored Entities Fannie Mae and Freddie Mac? Choose all that apply.
a. The federal government created Fannie Mae in 1938, and Freddie Mac in 1970.
b. Fannie Mae and Freddie Mac created securities with a corporate guarantee against default,
which were backed by mortgages.
c. Fannie Mae and Freddie Mac have been put under federal conservatorship in 2008.
d. Since their creation, the federal government has always explicitly guaranteed the securities
of both Fannie Mae and Freddie Mac. - ✔✔a. The federal government created Fannie Mae in
1938, and Freddie Mac in 1970.
b. Fannie Mae and Freddie Mac created securities with a corporate guarantee against default,
which were backed by mortgages.
c. Fannie Mae and Freddie Mac have been put under federal conservatorship in 2008.
The European Parliament has passed a directive in response to the financial crisis from 2007-
2008 that has later been incorporated into the Dodd-Frank Act from 2010. What, according to
the lecture, is the content of this directive and what is its purpose?
,a. Mortgage originators are required to keep 5% of the mortgage balances that they issue on
their books, which addresses the moral hazard problems inherent in the mortgage origination
process.
b. The directive required that only balloon payment mortgages could be securitized, which rules
out all the kinds of mortgages whose securitization has led to the financial crisis.
c. Mortgage originators are required to keep 100% of the mortgage balances that they issue on
their books, which eradicates the moral hazard problems inherent in the mortgage origination
process.
d. The directive has declared the entire mortgage securitization process illegal, because of the
role i - ✔✔a. Mortgage originators are required to keep 5% of the mortgage balances that they
issue on their books, which addresses the moral hazard problems inherent in the mortgage
origination process.
Why could individuals not easily invest directly in commercial real estate prior to the creation of
REITs?
a. Commercial real estate was not an allowed investment asset until REITs were created.
b. Individuals could invest in commercial real estate just as easily before the creation of REITs.
REITs just made it more tax advantageous to invest in real estate.
c. Most commercial real estate portfolios were own by DPPs, which small investors were not
allowed to participate in under U.S. law.
d. REITs created the asset class we now know as "commercial real estate". - ✔✔c. Most
commercial real estate portfolios were own by DPPs, which small investors were not allowed to
participate in under U.S. law.
Why do groups of investors who would want to invest in real estate tend to form Direct
Participation Programs (DPPs) instead of corporations to put together real estate portfolios?
a. DPPs avoid double taxation that corporations are exposed to.
b. DPPs tend to face fewer regulations and expose owners to less liability than corporations.
, c. US Federal law requires real estate portfolios to be held by DPPs. Corporations are not
allowed to hold commercial real estate as an investment. Corporations can only hold
commercial real estate if it is part of normal business operations.
d. Corporations are the primary vehicle used to hold real estate in the U.S. DPPs are less
popular. - ✔✔a. DPPs avoid double taxation that corporations are exposed to.
What are some characteristics that REITs must have in order to qualify for the tax advantages
setup by Congress? Select all that apply.
a. 90% of the company's income must be from real estate dividends, interest, and capital gains.
b. No more than 30% of the company's income can be from the sale of properties held less than
four years.
c. 75% of the company's assets must be invested in real estate or cash.
d. 95% of the company's income must be paid out
e. No more than 40% of the company's income can be paid out to limited partners. At least 60%
of the income must be paid to general partners. - ✔✔a. 90% of the company's income must be
from real estate dividends, interest, and capital gains.
b. No more than 30% of the company's income can be from the sale of properties held less than
four years.
c. 75% of the company's assets must be invested in real estate or cash.
d. 95% of the company's income must be paid out
When was the Federal Housing Authority (FHA) established and what does it do?
a. 1970. The FHA securitizes mortgages. That is, it buys them from mortgage originators,
bundles many mortgages together, repackages them, and sells the cash flows to investors as
new securities.
b. 1934. The FHA provides mortgage insurance that will pay towards a mortgage if the lender
defaults.
c. 1934. The FHA provides mortgage insurance that will pay towards a mortgage if the borrower
defaults.
Questions with Answers
Which of the following statements are true about Direct Participation Programs (DPPs) and Real
Estate Investment Trusts (REITs) in the U.S.? Select all that apply.
a. DPPs and REITs do not pay corporate profits tax.
b. REITs can be set up for all kinds of purposes, e.g. a financial advising company or a coal mine
can have the legal form of a REIT.
c. No investor in a DPP is protected by limited liability.
d. Because DPPs were not accessible for small investors, the U.S. Congress created the legal
framework for REITs in 1960. - ✔✔a. DPPs and REITs do not pay corporate profits tax.
d. Because DPPs were not accessible for small investors, the U.S. Congress created the legal
framework for REITs in 1960.
What is a balloon payment mortgage, as defined in Prof. Shiller's lecture?
a. It is a mortgage contract, in which the monthly payments consist of an interest component
and a principal repayment component, so that the mortgage balance, i.e. the remaining
principal, at the maturity date is equal to zero.
b. Mortgages that will subsequently be guaranteed by either Fannie Mae or Freddie Mac are
referred to as balloon payment mortgages.
c. It is a mortgage contract, where you only pay interest during the course of the contract and
repay the entire mortgage principal as a balloon-payment at the maturity date of the contract
d. It is a mortgage specifically suited for the financing of buildings that are used by the
ballooning industry. - ✔✔c. It is a mortgage contract, where you only pay interest during the
course of the contract and repay the entire mortgage principal as a balloon-payment at the
maturity date of the contract
,Consider a level payment, fixed rate, fully amortizing mortgage. What happens to the total
monthly payment and the interest payment component of the monthly payment, as the
mortgage contract gets closer to the maturity date?
a. The total monthly mortgage payment remains constant and the interest payment component
decreases.
b. The total monthly mortgage payment and the interest payment component increase.
c. The total monthly mortgage payment and the interest payment component decrease.
d. The total monthly mortgage payment remains constant and the interest payment component
increases. - ✔✔a. The total monthly mortgage payment remains constant and the interest
payment component decreases.
Which of the following statements are true with respect to the two U.S. Government
Sponsored Entities Fannie Mae and Freddie Mac? Choose all that apply.
a. The federal government created Fannie Mae in 1938, and Freddie Mac in 1970.
b. Fannie Mae and Freddie Mac created securities with a corporate guarantee against default,
which were backed by mortgages.
c. Fannie Mae and Freddie Mac have been put under federal conservatorship in 2008.
d. Since their creation, the federal government has always explicitly guaranteed the securities
of both Fannie Mae and Freddie Mac. - ✔✔a. The federal government created Fannie Mae in
1938, and Freddie Mac in 1970.
b. Fannie Mae and Freddie Mac created securities with a corporate guarantee against default,
which were backed by mortgages.
c. Fannie Mae and Freddie Mac have been put under federal conservatorship in 2008.
The European Parliament has passed a directive in response to the financial crisis from 2007-
2008 that has later been incorporated into the Dodd-Frank Act from 2010. What, according to
the lecture, is the content of this directive and what is its purpose?
,a. Mortgage originators are required to keep 5% of the mortgage balances that they issue on
their books, which addresses the moral hazard problems inherent in the mortgage origination
process.
b. The directive required that only balloon payment mortgages could be securitized, which rules
out all the kinds of mortgages whose securitization has led to the financial crisis.
c. Mortgage originators are required to keep 100% of the mortgage balances that they issue on
their books, which eradicates the moral hazard problems inherent in the mortgage origination
process.
d. The directive has declared the entire mortgage securitization process illegal, because of the
role i - ✔✔a. Mortgage originators are required to keep 5% of the mortgage balances that they
issue on their books, which addresses the moral hazard problems inherent in the mortgage
origination process.
Why could individuals not easily invest directly in commercial real estate prior to the creation of
REITs?
a. Commercial real estate was not an allowed investment asset until REITs were created.
b. Individuals could invest in commercial real estate just as easily before the creation of REITs.
REITs just made it more tax advantageous to invest in real estate.
c. Most commercial real estate portfolios were own by DPPs, which small investors were not
allowed to participate in under U.S. law.
d. REITs created the asset class we now know as "commercial real estate". - ✔✔c. Most
commercial real estate portfolios were own by DPPs, which small investors were not allowed to
participate in under U.S. law.
Why do groups of investors who would want to invest in real estate tend to form Direct
Participation Programs (DPPs) instead of corporations to put together real estate portfolios?
a. DPPs avoid double taxation that corporations are exposed to.
b. DPPs tend to face fewer regulations and expose owners to less liability than corporations.
, c. US Federal law requires real estate portfolios to be held by DPPs. Corporations are not
allowed to hold commercial real estate as an investment. Corporations can only hold
commercial real estate if it is part of normal business operations.
d. Corporations are the primary vehicle used to hold real estate in the U.S. DPPs are less
popular. - ✔✔a. DPPs avoid double taxation that corporations are exposed to.
What are some characteristics that REITs must have in order to qualify for the tax advantages
setup by Congress? Select all that apply.
a. 90% of the company's income must be from real estate dividends, interest, and capital gains.
b. No more than 30% of the company's income can be from the sale of properties held less than
four years.
c. 75% of the company's assets must be invested in real estate or cash.
d. 95% of the company's income must be paid out
e. No more than 40% of the company's income can be paid out to limited partners. At least 60%
of the income must be paid to general partners. - ✔✔a. 90% of the company's income must be
from real estate dividends, interest, and capital gains.
b. No more than 30% of the company's income can be from the sale of properties held less than
four years.
c. 75% of the company's assets must be invested in real estate or cash.
d. 95% of the company's income must be paid out
When was the Federal Housing Authority (FHA) established and what does it do?
a. 1970. The FHA securitizes mortgages. That is, it buys them from mortgage originators,
bundles many mortgages together, repackages them, and sells the cash flows to investors as
new securities.
b. 1934. The FHA provides mortgage insurance that will pay towards a mortgage if the lender
defaults.
c. 1934. The FHA provides mortgage insurance that will pay towards a mortgage if the borrower
defaults.
