Chapter 17 - Real Estate Finance

Question 1

A homeowner borrows money from a lender and gives the lender a mortgage on the property as collateral for the loan. The homeowner retains title to the property. This is an example of

a. intermediation.
b. forfeiture.
c. hypothecation.
d. subordination.

Answer 1

c. hypothecation.

Question 2

Which of the following best expresses the mechanics of a mortgage loan transaction?

a. The borrower gives the lender a note and a mortgage in exchange for loan funds.
b. The lender gives the borrower a mortgage and receives a note in exchange for loan funds.
c. The borrower receives a note in exchange for a mortgage from the lender.
d. The lender gives the borrower a note, loan funds and a mortgage.

Answer 2

a. The borrower gives the lender a note and a mortgage in exchange for loan funds.

Question 3

In a deed of trust transaction, which of the following occurs?

a. The beneficiary conveys title to a trustee in exchange for loan funds.
b. The trustee conveys title to a beneficiary in exchange for loan funds.
c. The trustor conveys title to a trustee in exchange for loan funds from the beneficiary.
d. The trustee conveys title to a trustor in exchange for loan funds from the beneficiary.

Answer 3

c. The trustor conveys title to a trustee in exchange for loan funds from the beneficiary.

Question 4

A lender lends money to a homeowner and takes legal title to the property as collateral during the payoff period. They are in a

a. title-theory state.
b. lien-theory state.
c. state allowing land trusts.
d. state where hypothecation is illegal.

Answer 4

a. title-theory state.

Question 5

A lender who charges a rate of interest in excess of legal limits is guilty of

a. redlining.
b. usury.
c. profit-taking.
d. nothing; there are no legal limits to interest rates.

Answer 5

b. usury.

Question 6

A lender is charging 3 points on a $50,000 loan. The borrower must therefore pay the lender an advance amount of

a. $150.
b. $300.
c. $1,500.
d. $3,000.

Answer 6

c. $1,500.

Question 7

The difference between a balloon loan and an amortized loan is

a. an amortized loan is paid off over the loan period.
b. a balloon loan always has a shorter loan term.
c. an amortized loan requires interest-payments.
d. a balloon loan must be retired in five years.

Answer 7

a. an amortized loan is paid off over the loan period.

Question 8

A distinctive feature of a promissory note is that

a. it is not assignable.
b. it must be accompanied by a mortgage.
c. it is a negotiable instrument.
d. it may not be prepaid.

Answer 8

c. it is a negotiable instrument.

Question 9

When the terms of the mortgage loan are satisfied, the mortgagee

a. may retain any overage in the escrow account.
b. may inspect the property before returning legal title.
c. may be entitled to charge the borrower a small fee to close the loan.
d. may be required to execute a release of mortgage document.

Answer 9

d. may be required to execute a release of mortgage document.

Question 10

n addition to income, credit, and employment data, a mortgage lender requires additional documentation, usually including

a. an appraisal report.
b. a criminal record report.
c. a subordination agreement.
d. a default recourse waiver.

Answer 10

a. an appraisal report.

Question 11

The three overriding considerations of a lender’s mortgage loan decision are

a. points, interest rate, and loan term.
b. the location of the mortgaged property, the borrower’s cash, and the amount of the borrower’s equity.
c. the ability to re-pay, the value of the collateral, and the profitability of the loan.
d. the amount of the loan, the borrower’s income, and the down payment.

Answer 11

c. the ability to re-pay, the value of the collateral, and the profitability of the loan.

Question 12

The loan-to-value ratio is an important underwriting criterion, for the primary reason that

a. borrowers with no equity will default and abandon the property.
b. the lender wants to ensure the loan is fully collateralized.
c. a borrower can only afford to borrow a portion of the entire purchase price.
d. a fair amount of borrower equity demonstrates good faith.

Answer 12

b. the lender wants to ensure the loan is fully collateralized.

Question 13

The Equal Credit Opportunity Act (ECOA) requires lenders to

a. extend equal credit to all prospective borrowers.
b. consider the income of a spouse in evaluating a family’s creditworthiness.
c. discount the income of a person involved in child-rearing or child-bearing.
d. specialize lending activity by geographical area for improved customer service.

Answer 13

b. consider the income of a spouse in evaluating a family’s creditworthiness.

Question 14

The purpose of an income ratio in qualifying a borrower is to

a. safeguard against over-indebtedness.
b. compare one’s earnings to one’s short-term debt.
c. identify the highest possible interest rate that the borrower can afford.
d. quantify the borrower’s assets to the fullest extent.

Answer 14

a. safeguard against over-indebtedness.

Question 15

A borrower’s debt ratio is derived by

a. dividing one’s total debt by one’s debt payments.
b. dividing one’s gross income by one’s assets.
c. dividing one’s gross income by one’s debts.
d. dividing one’s debts by one’s gross income.

Answer 15

d. dividing one’s debts by one’s gross income.

Question 16

A lender’s commitment to lend funds to a borrower in order to retire another outstanding loan is called a

a. conditional loan commitment.
b. firm loan commitment.
c. take-out loan commitment.
d. lock-in loan commitment.

Answer 16

c. take-out loan commitment.

Question 17

At the closing of a mortgage loan

a. the borrower pays off the note and receives clear title.
b. the lender issues a firm loan commitment.
c. the parties complete all loan origination documents and the loan is funded.
d. the borrower’s loan application is complete and the file closed.

Answer 17

c. the parties complete all loan origination documents and the loan is funded.

Question 18

Which laws or regulations require mortgage lenders to disclose financing costs and annual percentage rate to a borrower before funding a loan?

a. The Equal Credit Opportunity Act
b. Truth-in-Lending laws
c. The Real Estate Settlement and Procedures Act
d. Federal Fair Housing Laws

Answer 18

b. Truth-in-Lending laws

Question 19

Which laws or regulations prevent mortgage lenders from discriminating in extending credit to potential borrowers based on race, color, religion, national origin, sex, marital status, age, and dependency on public assistance?

a. The Equal Credit Opportunity Act
b. Truth-in-Lending laws
c. The Real Estate Settlement and Procedures Act
d. Federal Fair Housing Laws

Answer 19

a. The Equal Credit Opportunity Act

Question 20

Which laws or regulations require mortgage lenders to provide an estimate of closing costs to a borrower and forbid them to pay kickbacks for referrals?

a. the Equal Credit Opportunity Act.
b. Truth-in-Lending laws.
c. the Real Estate Settlement and Procedures Act.
d. Federal Fair Housing Laws.

Answer 20

c. the Real Estate Settlement and Procedures Act.

Question 21

The Federal Reserve System regulates the money supply in which of the following ways?

a. Selling securities, printing money, and controlling lending underwriting requirements
b. Buying securities, changing the discount rate, and controlling banking reserves
c. Printing money, changing interest rates, and selling T-bills
d. Controlling the prime rate, trading securities, and purchasing loans

Answer 21

b. Buying securities, changing the discount rate, and controlling banking reserves

Question 22

One of the primary purposes for the secondary mortgage market is to

a. cycle funds back to primary lenders so they can make more loans.
b. issue second mortgages and sell them in the home equity market.
c. lend funds to banks so they can make more loans.
d. pay off defaulted loans made by primary mortgage lenders.

Answer 22

a. cycle funds back to primary lenders so they can make more loans.

Question 23

The major players in the secondary mortgage market are

a. Fannie Mae, Freddie Mac, and Ginnie Mae.
b. Fannie Mae, GMAC, and MGIC.
c. Freddie Mac, FHA, and VA.
d. Fannie Mae, Freddie Mac, and the Federal Reserve.

Answer 23

a. Fannie Mae, Freddie Mac, and Ginnie Mae.

Question 24

A principal role of FNMA is to

a. guarantee FHA-backed and VA-backed loans.
b. insure FHA-backed and VA-backed loans.
c. purchase FHA-backed and VA-backed loans.
d. originate FHA-backed and VA-backed loans.

Answer 24

c. purchase FHA-backed and VA-backed loans.

Question 25

The primary role of the Federal Housing Authority in the mortgage lending market is to

a. guarantee loans made by approved lenders.
b. insure loans made by approved lenders.
c. purchase loans made by approved lenders.
d. originate loans made by approved lenders.

Answer 25

b. insure loans made by approved lenders.

Question 26

The principal role of the Veteran’s Administration in the mortgage lending market is to

a. guarantee loans made by approved lenders.
b. insure loans made by approved lenders.
c. purchase loans made by approved lenders.
d. originate loans made by approved lenders.

Answer 26

a. guarantee loans made by approved lenders.

Question 27

A graduated payment loan is a mortgage loan where

a. loan funds are disbursed to the borrower on a graduated basis.
b. the interest rate periodically increases in graduated phases.
c. the loan payments gradually increase.
d. the loan payments gradually increase and the loan term gradually decreases.

Answer 27

c. the loan payments gradually increase.

Question 28

A buydown is a financing arrangement where

a. the lender lowers the interest rate on a loan in exchange for a prepayment of principal.
b. the borrower pays additional interest at the onset in order to obtain a lower interest rate.
c. the lender requires the borrower to buy down the price of the property by increasing the down payment.
d. the borrower pays the lender additional funds to buy down the term of the loan.

Answer 28

b. the borrower pays additional interest at the onset in order to obtain a lower interest rate.

Question 29

The key feature of an adjustable mortgage loan is that

a. the interest rate may vary.
b. the monthly payment increases over the life of the loan.
c. the principal balance does not amortize.
d. the loan term can be shortened or lengthened.

Answer 29

a. the interest rate may vary

Question 30

One feature of a wraparound mortgage loan is that

a. the loan is a senior loan.
b. the seller offering the buyer a wraparound can profit from a difference in interest rates.
c. the underlying loan must be retired.
d. the second mortgage borrower may make payments directly to the first mortgage lender.

Answer 30

b. the seller offering the buyer a wraparound can profit from a difference in interest rates.

Question 31

A builder is required to secure a loan with mortgages on three properties. This is an example of

a. a participation mortgage loan.
b. a blanket mortgage loan.
c. a permanent mortgage loan.
d. a bridge loan.

Answer 31

b. a blanket mortgage loan.

Question 32

Which of the following is true of a loan with negative amortization?

a. The loan is an interest-only loan.
b. Payments are not sufficient to retire the loan.
c. The loan balance is diminishing, or going negative.
d. Additional interest is being added to the monthly payment.

Answer 32

b. Payments are not sufficient to retire the loan.