Chapter 17 - Lending

Question 1

Mortgage Financing:

Answer 1

Financing that uses mortgaged real property as security for borrowed funds.

Question 2

Hypothecation:

Answer 2

Use of real property as collateral for a mortgage loan

Question 3

Lien Theory:

Answer 3

A state whose laws give a lender on a mortgaged property equitable title rather than legal title.

Question 4

Title Theory:

Answer 4

A state whose laws give legal title of a mortgaged property to the mortgagee until the mortgagor satisfies the terms and obligations of the loan.

Question 5

Note:

Answer 5

An agreement to repay a loan of an indicated amount under certain terms.

Question 6

Mortgage:

Answer 6

A legal document wherein a mortgagor pledges ownership interests in a property to a lender, or mortgagee, as collateral against performance of the mortgage debt obligation.

Question 7

Mortgagor:

Answer 7

The borrower in a mortgage.

Question 8

Mortgagee:

Answer 8

The lender in a mortgage.

Question 9

Deed of Trust:

Answer 9

An instrument used by a borrower to convey title to mortgaged property to a trustee to be held as security for the lender, who is the beneficiary of the trust.

Question 10

Principal:

Answer 10

The loan balance to which interest charges are applied.

Question 11

Loan Balance:

Answer 11

At any point during the life of a mortgage loan, the remaining unpaid principal is called the loan balance, or remaining balance.

Question 12

Interest:

Answer 12

A lender’s charge for the use of the principal amount of a loan.

Question 13

Points:

Answer 13

A discount point is one percent of the loan amount. Thus, one point on a $100,000 loan equals $1,000. The lender charges this as pre-paid interest at closing by funding only the face amount of the loan minus the discount points. The borrower, however, must repay the full loan amount, along with interest calculated on the full amount.

Question 14

Term:

Answer 14

The loan term is the period of time over which the loan must be repaid. A “30-year loan” is a loan whose balance must be fully paid off at the end of thirty years.

Question 15

Payment:

Answer 15

The loan term, loan amount, and interest rate combine to determine the periodic payment amount. When these three quantities are known, it is possible to identify the periodic payment from a mortgage table or with a financial calculator. Mortgage payments are usually made on a monthly basis. On an amortizing loan, a portion of the payment goes to repay the loan balance in advance, and a portion goes to payment of interest in arrears.

Question 16

Mortgage Insurance:

Answer 16

An insurance policy, purchased by a borrower, that protects a lender against loss of that portion of a mortgage loan which exceeds the acceptable loan-to-value ratio.

Question 17

Underwriting:

Answer 17

A process of investigating the financial capabilities and creditworthiness of a prospective borrower and granting credit to a qualified borrower.

Question 18

Qualification:

Answer 18

A mortgage underwriting procedure to determine the financial capabilities and credit history of a prospective borrower.

Question 19

Loan-To-Value Ratio:

Answer 19

An underwriting ratio that relates the size of a loan to the market value of the collateral. The closer the loan value is to market value, the riskier the loan is for the lender , since the lender is less likely to recover the debt fully from the proceeds of a foreclosure sale.

Question 20

Equal Credit Opportunity Act:

Answer 20

Requires a lender to evaluate a loan applicant on the basis of that applicant’s own income and credit rating, unless the applicant requests the inclusion of another’s income and credit rating in the application.

Question 21

Income Ratio:

Answer 21

An underwriting ratio that relates a borrower’s gross or net income and the debt service of a loan; used to determine how large a loan a borrower can reasonably afford.

Question 22

Debt Ratio:

Answer 22

An underwriting equation that is used to determine how much debt an individual can reasonably afford in view of the party’s or household’s income.

Question 23

Loan Commitment:

Answer 23

A lender’s written pledge to lend funds under specific terms. May contain deadlines and conditions.

Question 24

Regulation Z:

Answer 24

A fair financing law applying to residential loans; lenders must disclose financing costs and relevant terms of the loan to the borrower.

Question 25

Real Estate Settlement Procedures Act:

Answer 25

A federal law which aims to standardize settlement practices and ensure that buyers understand settlement costs. RESPA applies to purchases of residential real estate (one- to four-family homes) to be financed by “federally related” first mortgage loans.

Question 26

Primary Mortgage Market:

Answer 26

Lenders and mortgage brokers who originate mortgage loans directly to borrowers.

Question 27

Secondary Mortgage Market:

Answer 27

Lenders, investors, and government agencies who buy, sell, insure, or guarantee existing mortgages, mortgage pools, and mortgage-backed securities.

Question 28

Fannie Mae:

Answer 28

A government-sponsored agency in the secondary mortgage market which buys conventional, FHA, and VA loans, sells mortgage-backed securities, and guarantees payment of principal and interest on the securities.

Question 29

Ginnie Mae:

Answer 29

A division of HUD which guarantees FNMA mortgages and securities backed by pools of VA-guaranteed and FHA-insured mortgages.

Question 30

Freddie Mac:

Answer 30

A major secondary mortgage market organization which buys conventional, FHA, and VA loans and sells mortgage-backed securities.

Question 31

FHA:

Answer 31

The Federal Housing Administration (FHA) is an agency of the Department of Housing and Urban Development (HUD). It does not lend money, but insures permanent long-term loans made by others.

Question 32

Assumability:

Answer 32

Rules for assumability vary according to when the FHA-insured loan was originated and whether the original loan was for an investment property or an owner-occupied principal residence. Loans originated before December 1, 1986, are generally assumable without restriction. Loans originated after December 1, 1986, require that the assumer show creditworthiness. Loans originated after December 15, 1989, may not be assumed unless the borrower fully qualifies. No loans for investment or non-owner-occupied properties originated after the latter date are assumable.

Question 33

VA:

Answer 33

The Veterans Administration (Department of Veterans Affairs) offers loan guarantees to qualified veterans. The VA, like the FHA, does not lend money except in certain areas where other financing is not generally available. Instead, the VA partially guarantees permanent long-term loans originated by VA-approved lenders on properties that meet VA standards. The VA’s guarantee enables lenders to issue loans with higher loan-to-value ratios than would otherwise be possible. The interest rate on a VA-guaranteed loan is usually lower than one on a conventional loan. The borrower does not pay any premium for the loan guarantee, but does pay a VA funding fee at closing.

Question 34

Amortization:

Answer 34

A partial or complete reduction of a loan’s principal balance over the loan term, achieved by periodic payments which include principal as well as interest.

Question 35

Adjustable Rate Loan:

Answer 35

A mortgage loan having an interest rate that can be periodically raised or lowered in accordance with the movement of a financial index.

Question 36

Seller Financing:

Answer 36

Any financing arrangement where a seller takes a note and mortgage from the buyer for all or part of the purchase price of the property.

Question 37

Negatively amortized loan

Answer 37

Negative amortization causes the loan balance to increase over the term. This occurs if the borrower’s periodic payment is insufficient to cover the interest owed for the period. The lender adds the amount of unpaid interest to the borrower’s loan balance. Temporary negative amortization occurs on graduated payment loans, and may occur on an adjustable rate mortgage.

Question 38

Regulating the money supply. The Federal Reserve System regulates the money supply by means of three methods:

Answer 38

selling or re-purchasing government securities, primarily Treasury bills
changing the reserve requirement for member banks. The reserve is a percentage of depositors’ funds that banks and other regulated financial institutions may not lend out.
changing the interest rate, or discount rate, the system charges member institutions for borrowing funds from the Federal Reserve System central banks