REE3043 Exam 4 ucf AND REVIEW
QUESTIONS WITH COMPLETE
SOLUTIONS.
1. The element of an adjustable interest rate that is the "moving part" is the: - Answer B.
Index
2. Suppose a bank recognizes substantial deterioration in a borrower's credit score and notifies
him that he must pay his home equity line of credit in full. The mortgage clause that makes this
possible is known as the: - Answer A. Demand clause
3. Which of the following types of loans is the most likely to contain a due-on-sale clause? -
Answer C. Conventional home loan
4. Even after a property goes into foreclosure, it is still possible for the borrower to reclaim the
property as long as he or she produces the outstanding mortgage balance and all foreclosure
costs incurred to that point. This right may even extend beyond the date of the foreclosure sale.
This right is referred to as: - Answer B. Statutory redemption
5. From a home mortgage lender's perspective, which statement is true about the effect of
bankruptcy upon foreclosure? - Answer A. Chapter 7 bankruptcy is the most "lender friendly"
form
6. When a buyer of a property with an existing FHA mortgage loan acquires a property by
putting her signature on the note for the existing loan, the buyer is acquiring the property: -
Answer A. By assumption
8. Given the following information, calculate the balloon payment for a partially amortized
mortgage. Loan amount: $100,000, Term to maturity: 5 years, Amortization term: 30 years,
Interest rate: 6%, Discount points: 1. Hint: Calculate the monthly payment as the first step. -
Answer D. $93,054
Annual interest rate: 6%
Loan term: 30 years
Loan amount: $150,000
Lender's discount points: $1,500 (1%)
Third party closing costs: $4,000
9. Calculate lender's yield with no prepayment given the monthly loan payment is $899.33. -
Answer A. 6.09%
,Annual interest rate: 6%
Loan term: 30 years
Loan amount: $150,000
Lender's discount points: $1,500 (1%)
Third party closing costs: $4,000
10. Calculate effective borrowing cost with no prepayment given the monthly loan payment is
$899.33 - Answer C. 6.35%
Annual interest rate: 6%
Loan term: 30 years
Loan amount: $150,000
Lender's discount points: $1,500 (1%)
Third party closing costs: $4,000
11. Calculate effective borrowing cost with prepayment in five years given the monthly payment
is $899.33 and the remaining balance at five years is $139,581.54. - Answer C. 6.90%
12. Suppose a borrower has a choice between two fixed-rate mortgage loans with the same
interest rate, but different mortgage terms, one being a 30-year mortgage and the other a 15-
year mortgage. Under financially unconstrained circumstances, which of the following
statements best describes the borrower's preference? - Answer C. The borrower would be
indifferent between the two mortgages
Loan amount: $150,000
Initial contract rate: 6%
Margin: 2.75
Loan term: 30 years
Periodic cap: 2% +/-
Life-of-loan cap: 5%
Index rate at end of year 5: 5.5%
Remaining loan balance at end of year 5: $139,581.54
13. Calculate the monthly payment in year 6 for a 5/1 adjustable rate mortgage that is tied to
the 1-year Treasury rate and with the following terms. - Answer C. $1,077.31
14. One reason why adjustable-rate mortgages (ARMs) have become popular has to do with the
impact that they have on the interest rate risk that is borne by the parties involved. If interest
rates were to rise on a level-payment mortgage (LPM) the interest rate risk of the loan would
typically be borne by: - Answer B. Lender only
, 15. 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 B. Secondary mortgage market
16. Conforming conventional loans are loans that: - Answer C. Are eligible for purchase by
Fannie Mae and Freddie Mac
17. Probably the greatest contribution of FHA to home mortgage lending was to: - Answer A.
Establish the use of the 30 year level-payment, fully amortizing loan
18. A mortgage intended to enable older homeowners with limited incomes to access the
equity in their home is the: - Answer D. Reverse-annuity mortgage
19. Suppose you are interested in taking a mortgage loan for $250,000 in order to purchase a
principal residence. Your lender has suggested an FHA loan based on your credit and funds
available for down payment. FHA financing requires that you pay an up-front mortgage
insurance premium (UFMIP) of 1.75% of the mortgage balance. If the interest rate on the fully-
amortizing mortgage loan is 6% and the term is 30 years, what is your monthly mortgage
payment assuming the UFMIP is financed? - Answer B. $1,525.11
20. Suppose you have just purchased a home for $300,000 and made a 5% down-payment. In
order to make the loan, the lender requires you to obtain private mortgage insurance (PMI) on
their behalf with 30% coverage. Suppose over time you paid down the principal of the loan to
$280,000 and at that point in time you can no longer make any mortgage payments (i.e., you
default on the loan). If the lender were to foreclose on your property and sell it for $180,000,
what would the lender's loss of principal be, taking into consideration the protection of
mortgage insurance? - Answer B. $14,500
21. The reduced importance of certain financial institutions in the primary mortgage market has
been largely offset by an expanded role for others. Which has diminished, and which has
expanded? - Answer D. Thrifts; mortgage bankers
22. Short-term lending 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 is referred to as: - Answer C. Warehousing
23. In class we identified four channels by which first mortgage home loans are created in the
modern framework of home mortgage lending. Within which of the following channels would
you typically find a Wall Street investment bank obtaining loans, pooling those loans, and
creating a senior-subordinate security structure? - Answer D. Nonconforming conventional
lending - private securitization
QUESTIONS WITH COMPLETE
SOLUTIONS.
1. The element of an adjustable interest rate that is the "moving part" is the: - Answer B.
Index
2. Suppose a bank recognizes substantial deterioration in a borrower's credit score and notifies
him that he must pay his home equity line of credit in full. The mortgage clause that makes this
possible is known as the: - Answer A. Demand clause
3. Which of the following types of loans is the most likely to contain a due-on-sale clause? -
Answer C. Conventional home loan
4. Even after a property goes into foreclosure, it is still possible for the borrower to reclaim the
property as long as he or she produces the outstanding mortgage balance and all foreclosure
costs incurred to that point. This right may even extend beyond the date of the foreclosure sale.
This right is referred to as: - Answer B. Statutory redemption
5. From a home mortgage lender's perspective, which statement is true about the effect of
bankruptcy upon foreclosure? - Answer A. Chapter 7 bankruptcy is the most "lender friendly"
form
6. When a buyer of a property with an existing FHA mortgage loan acquires a property by
putting her signature on the note for the existing loan, the buyer is acquiring the property: -
Answer A. By assumption
8. Given the following information, calculate the balloon payment for a partially amortized
mortgage. Loan amount: $100,000, Term to maturity: 5 years, Amortization term: 30 years,
Interest rate: 6%, Discount points: 1. Hint: Calculate the monthly payment as the first step. -
Answer D. $93,054
Annual interest rate: 6%
Loan term: 30 years
Loan amount: $150,000
Lender's discount points: $1,500 (1%)
Third party closing costs: $4,000
9. Calculate lender's yield with no prepayment given the monthly loan payment is $899.33. -
Answer A. 6.09%
,Annual interest rate: 6%
Loan term: 30 years
Loan amount: $150,000
Lender's discount points: $1,500 (1%)
Third party closing costs: $4,000
10. Calculate effective borrowing cost with no prepayment given the monthly loan payment is
$899.33 - Answer C. 6.35%
Annual interest rate: 6%
Loan term: 30 years
Loan amount: $150,000
Lender's discount points: $1,500 (1%)
Third party closing costs: $4,000
11. Calculate effective borrowing cost with prepayment in five years given the monthly payment
is $899.33 and the remaining balance at five years is $139,581.54. - Answer C. 6.90%
12. Suppose a borrower has a choice between two fixed-rate mortgage loans with the same
interest rate, but different mortgage terms, one being a 30-year mortgage and the other a 15-
year mortgage. Under financially unconstrained circumstances, which of the following
statements best describes the borrower's preference? - Answer C. The borrower would be
indifferent between the two mortgages
Loan amount: $150,000
Initial contract rate: 6%
Margin: 2.75
Loan term: 30 years
Periodic cap: 2% +/-
Life-of-loan cap: 5%
Index rate at end of year 5: 5.5%
Remaining loan balance at end of year 5: $139,581.54
13. Calculate the monthly payment in year 6 for a 5/1 adjustable rate mortgage that is tied to
the 1-year Treasury rate and with the following terms. - Answer C. $1,077.31
14. One reason why adjustable-rate mortgages (ARMs) have become popular has to do with the
impact that they have on the interest rate risk that is borne by the parties involved. If interest
rates were to rise on a level-payment mortgage (LPM) the interest rate risk of the loan would
typically be borne by: - Answer B. Lender only
, 15. 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 B. Secondary mortgage market
16. Conforming conventional loans are loans that: - Answer C. Are eligible for purchase by
Fannie Mae and Freddie Mac
17. Probably the greatest contribution of FHA to home mortgage lending was to: - Answer A.
Establish the use of the 30 year level-payment, fully amortizing loan
18. A mortgage intended to enable older homeowners with limited incomes to access the
equity in their home is the: - Answer D. Reverse-annuity mortgage
19. Suppose you are interested in taking a mortgage loan for $250,000 in order to purchase a
principal residence. Your lender has suggested an FHA loan based on your credit and funds
available for down payment. FHA financing requires that you pay an up-front mortgage
insurance premium (UFMIP) of 1.75% of the mortgage balance. If the interest rate on the fully-
amortizing mortgage loan is 6% and the term is 30 years, what is your monthly mortgage
payment assuming the UFMIP is financed? - Answer B. $1,525.11
20. Suppose you have just purchased a home for $300,000 and made a 5% down-payment. In
order to make the loan, the lender requires you to obtain private mortgage insurance (PMI) on
their behalf with 30% coverage. Suppose over time you paid down the principal of the loan to
$280,000 and at that point in time you can no longer make any mortgage payments (i.e., you
default on the loan). If the lender were to foreclose on your property and sell it for $180,000,
what would the lender's loss of principal be, taking into consideration the protection of
mortgage insurance? - Answer B. $14,500
21. The reduced importance of certain financial institutions in the primary mortgage market has
been largely offset by an expanded role for others. Which has diminished, and which has
expanded? - Answer D. Thrifts; mortgage bankers
22. Short-term lending 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 is referred to as: - Answer C. Warehousing
23. In class we identified four channels by which first mortgage home loans are created in the
modern framework of home mortgage lending. Within which of the following channels would
you typically find a Wall Street investment bank obtaining loans, pooling those loans, and
creating a senior-subordinate security structure? - Answer D. Nonconforming conventional
lending - private securitization
