REE3043 REVIEW TEST QUESTIONS
WITH ALL CORRECT SOLUTIONS
Two important advantages of automated underwriting are that it is __________ and it
enables lenders to more safely make ________ loans. - Answer-Two important
advantages of automated underwriting are that it is faster and it enables lenders to more
safely make affordable housing loans.
What two contracts are always involved in a mortgage loan? - Answer-A borrower
always conveys a mortgage and a note to the lender in the mortgage loan.
The two most common types of caps in an adjustable rate mortgage are: - Answer-
periodic caps and overall caps
What happens to the balance of a loan with negative amortization? - Answer-A loan
balance with negative amortization will increase because the scheduled payment is
insufficient to cover the accumulated interest.
What is a balloon loan? - Answer-A balloon loan has a amortization term that
determines interest and principal payments as if it were a fully amortized loan and a
shorter term for maturity at which the remaining loan balance must be paid in full.
Of theses types of loans, which typically have prepayment restrictions or penalties? a.
standard home loan b. large home loan c. subprime loan d. commercial property
mortgage loan - Answer-Prepayment penalties occur mainly in large home loans,
subprime loans, and commercial mortgage loans.
Why does a mortgage lender want to be able to pay the property taxes on behalf of a
mortgage borrower? - Answer-The mortgage lender wants to be able to pay the
property taxes on behalf of the borrower because the property tax lien is superior to the
mortgage and can preempt it in default.
What types of standard home loans are assumable? - Answer-FHA and Va loans are
assumable, subject to the buyer's ability to qualify for the loan.
In practice, lenders commonly define default as occurring when a loan is __________
days overdue. - Answer-In practice, lenders commonly define default as occurring when
a loan is 90 days overdue.L
Give two reasons a lender might be ill-advised to accept a deed in lieu of foreclosure for
a distressed property. - Answer-Lenders may be ill-advised to accept a deed in lieu of
foreclosure because liens may remain with the property even after it is conveyed back
,to the lender. Also, if the borrower claims bankruptcy, the lender may ultimately lose its
priority claim to the property.
Depending on the state, the process of foreclosure sale is either _______ or ________ .
The method most favorable to a lender is _______. - Answer-Depending on the state,
the process of foreclosure is either judicial foreclosure or by power of sale. The method
most favorable to a lender is power of sale.
Which form of bankruptcy is least harmful to a lender's mortgage interest? - Answer-
Chapter 7 bankruptcy is the least harmful type of bankruptcy to a lender's mortgage
interest.
What law prohibits discrimination in lending by race, sex, religion, and national origin?
What types of income discrimination does it prohibit? - Answer-The Equal Credit
Opportunity Act prohibits discrimination in lending by race, sex, religion, and national
origin. It also prohibits discrimination because an applicant receives income from a
public assistance program.
Which of the following entities provides mortgage origination services and initial funding
within the "originate to distribute" framework? - Answer-Mortgage Banker
-Model: Fund and Hold
-Earn origination fees and interest income - Answer-Portfolio lender
-Model: Originate to Distribute
-earn origination fees and gain on sale
-common to retain servicing rights - Answer-Mortgage Banker
In securitization, mortgages are pooled together and certain cash flows are packaged
into mortgage back securities (MBS) to be sold to investors. An MBS entitles the
investor to a share of which cash flows generate by the underlying mortgages in the
pool? - Answer-principal and interest paid
Calculate the total debt ratio. Principal and interest on mortgage loan: $635; Tax and
insurance payments in escrow: $125; Car loan payment (2 years remaining on loan):
$350; Gross monthly income: $3,000 - Answer-37%
($635+$125+$350)/$3000 = 0.37 = 37%
Mortgage originators can either hold loans in their portfolios or sell them to investors.
When a mortgage originator decides to sell mortgages to another institution, this
transaction occurs in what is commonly referred to as the: - Answer-Secondary
mortgage market
, -primary mortgage market is where loans are originated
-secondary market is where they are sold and serviced
-secondary market provides liquidity to the primary and solves the asset-liability duration
mismatch problem for lenders who fund their mortgages using funds from depositors
With a mortgage backed security (MBS) issued by one of the government sponsored
enterprises (GSEs), Fannie Mae and Freddie Mac, the issuing GSE retains ________
risk white the MBS investor faces the ________ risk. - Answer-Credit, Prepayment
-market risk: the potential for the value of the bond to fall if interest rates increase
-paid early = prepayment risk
-market separates the credit and prepayment risks in order to achieve more transparent
pricing
-MBS investors face prepayment and market risk
-GSE's, as guarantors, face credit risk
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? - Answer-Loan-to-value ratio
-collateral is evaluated by loan to value ratio as established by a professional appraiser
-
Which of the "3 C's" has the most power in predicting default? - Answer-Collateral
-Higher LTV loans are associated with a greater risk of default (more difficult to sell the
home to avoid foreclosure) and greater lender loss, given default (smaller equity
cushion)
What are the "3 C's"? - Answer-Credit, Capacity, Collateral
-credit is measured by credit score (FICO)
-ability to pay is measured by housing expense and debt ratios
As part of their underwriting process, lenders may rely on debt ratios to ascertain
whether borrowers have the ability to make regular payments on their mortgages.
Utilizing the following information, calculate the housing expense (front-end) debt ratio
we learned in class. Monthly principal and interest on mortgage loan: $1500; Monthly
tax and insurance payments into escrow: $200; Estimated monthly utility bills: $350;
Monthly car loan payment (2 years remaining on loan): $400; Gross monthly income:
$6,000. - Answer-28.3%
WITH ALL CORRECT SOLUTIONS
Two important advantages of automated underwriting are that it is __________ and it
enables lenders to more safely make ________ loans. - Answer-Two important
advantages of automated underwriting are that it is faster and it enables lenders to more
safely make affordable housing loans.
What two contracts are always involved in a mortgage loan? - Answer-A borrower
always conveys a mortgage and a note to the lender in the mortgage loan.
The two most common types of caps in an adjustable rate mortgage are: - Answer-
periodic caps and overall caps
What happens to the balance of a loan with negative amortization? - Answer-A loan
balance with negative amortization will increase because the scheduled payment is
insufficient to cover the accumulated interest.
What is a balloon loan? - Answer-A balloon loan has a amortization term that
determines interest and principal payments as if it were a fully amortized loan and a
shorter term for maturity at which the remaining loan balance must be paid in full.
Of theses types of loans, which typically have prepayment restrictions or penalties? a.
standard home loan b. large home loan c. subprime loan d. commercial property
mortgage loan - Answer-Prepayment penalties occur mainly in large home loans,
subprime loans, and commercial mortgage loans.
Why does a mortgage lender want to be able to pay the property taxes on behalf of a
mortgage borrower? - Answer-The mortgage lender wants to be able to pay the
property taxes on behalf of the borrower because the property tax lien is superior to the
mortgage and can preempt it in default.
What types of standard home loans are assumable? - Answer-FHA and Va loans are
assumable, subject to the buyer's ability to qualify for the loan.
In practice, lenders commonly define default as occurring when a loan is __________
days overdue. - Answer-In practice, lenders commonly define default as occurring when
a loan is 90 days overdue.L
Give two reasons a lender might be ill-advised to accept a deed in lieu of foreclosure for
a distressed property. - Answer-Lenders may be ill-advised to accept a deed in lieu of
foreclosure because liens may remain with the property even after it is conveyed back
,to the lender. Also, if the borrower claims bankruptcy, the lender may ultimately lose its
priority claim to the property.
Depending on the state, the process of foreclosure sale is either _______ or ________ .
The method most favorable to a lender is _______. - Answer-Depending on the state,
the process of foreclosure is either judicial foreclosure or by power of sale. The method
most favorable to a lender is power of sale.
Which form of bankruptcy is least harmful to a lender's mortgage interest? - Answer-
Chapter 7 bankruptcy is the least harmful type of bankruptcy to a lender's mortgage
interest.
What law prohibits discrimination in lending by race, sex, religion, and national origin?
What types of income discrimination does it prohibit? - Answer-The Equal Credit
Opportunity Act prohibits discrimination in lending by race, sex, religion, and national
origin. It also prohibits discrimination because an applicant receives income from a
public assistance program.
Which of the following entities provides mortgage origination services and initial funding
within the "originate to distribute" framework? - Answer-Mortgage Banker
-Model: Fund and Hold
-Earn origination fees and interest income - Answer-Portfolio lender
-Model: Originate to Distribute
-earn origination fees and gain on sale
-common to retain servicing rights - Answer-Mortgage Banker
In securitization, mortgages are pooled together and certain cash flows are packaged
into mortgage back securities (MBS) to be sold to investors. An MBS entitles the
investor to a share of which cash flows generate by the underlying mortgages in the
pool? - Answer-principal and interest paid
Calculate the total debt ratio. Principal and interest on mortgage loan: $635; Tax and
insurance payments in escrow: $125; Car loan payment (2 years remaining on loan):
$350; Gross monthly income: $3,000 - Answer-37%
($635+$125+$350)/$3000 = 0.37 = 37%
Mortgage originators can either hold loans in their portfolios or sell them to investors.
When a mortgage originator decides to sell mortgages to another institution, this
transaction occurs in what is commonly referred to as the: - Answer-Secondary
mortgage market
, -primary mortgage market is where loans are originated
-secondary market is where they are sold and serviced
-secondary market provides liquidity to the primary and solves the asset-liability duration
mismatch problem for lenders who fund their mortgages using funds from depositors
With a mortgage backed security (MBS) issued by one of the government sponsored
enterprises (GSEs), Fannie Mae and Freddie Mac, the issuing GSE retains ________
risk white the MBS investor faces the ________ risk. - Answer-Credit, Prepayment
-market risk: the potential for the value of the bond to fall if interest rates increase
-paid early = prepayment risk
-market separates the credit and prepayment risks in order to achieve more transparent
pricing
-MBS investors face prepayment and market risk
-GSE's, as guarantors, face credit risk
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? - Answer-Loan-to-value ratio
-collateral is evaluated by loan to value ratio as established by a professional appraiser
-
Which of the "3 C's" has the most power in predicting default? - Answer-Collateral
-Higher LTV loans are associated with a greater risk of default (more difficult to sell the
home to avoid foreclosure) and greater lender loss, given default (smaller equity
cushion)
What are the "3 C's"? - Answer-Credit, Capacity, Collateral
-credit is measured by credit score (FICO)
-ability to pay is measured by housing expense and debt ratios
As part of their underwriting process, lenders may rely on debt ratios to ascertain
whether borrowers have the ability to make regular payments on their mortgages.
Utilizing the following information, calculate the housing expense (front-end) debt ratio
we learned in class. Monthly principal and interest on mortgage loan: $1500; Monthly
tax and insurance payments into escrow: $200; Estimated monthly utility bills: $350;
Monthly car loan payment (2 years remaining on loan): $400; Gross monthly income:
$6,000. - Answer-28.3%
