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FINN 3053 > Chapter 7 > Flashcards

Chapter 7 Flashcards

1
Q
  • Loan to an individuals or business to purchase real property
  • secured, or collateralized, loans
  • assets purchased are collateral against the loan
  • mortgage holder, or lender, has a ‘lien’ on the assets
A

mortgage

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2
Q

Securities packaged and sold as assets backing a publicly traded or privately held debt instrument

A

securitized

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3
Q

4 types of mortgages

A
  • home
  • multifamily
  • commercial
  • farm
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4
Q

A public record attached to the title of the property that gives the financial institution the right to sell the property if the mortgage borrower defaults.

A

lien

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5
Q

used to purchase one-to-four family dwellings
- largest loan category
- “residential”

A

home mortgages (also called single-family mortgage)

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6
Q

used to finance the purchase of apartment complexes, townhomes, and condominiums

A

multifamily dwelling

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7
Q

are used to finance the purchase of real estate for business purposes (office buildings, shopping malls)

A

commercial mortgages

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8
Q

used to finance the purchase of farmland, buildings, etc.

A

farm mortgages

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9
Q

lenders have liens against properties until the loan is fully paid off

A

collateral

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10
Q

A portion of the purchase price of the property a financial institution requires the mortgage borrower to pay up front
- 5-10% (book says 20%) is required

A

down payment

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11
Q

Insurance contract purchased by a mortgage borrower guaranteeing to pay the financial institution the difference between the value of the property and the balance remaining on the mortgage

A

private mortgage insurance (PMI)

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12
Q

required for all single-family mortgages with loan-to-value ratios greater than 80%

A

private mortgage insurance (PMI)

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13
Q

Mortgages issued by financial institutions that are not federally insured.

A

conventional mortgages

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14
Q

Mortgages originated by financial institutions, with repayment guaranteed by either the Federal Housing Administration (FHA) or the Veterans Administration (VA).

A

federally insured mortgages

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15
Q
  • limits to amount borrowed, by region
  • down payments may be as little as 3.5%
A

federally insured

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16
Q
  • agreement between bank and borrower
  • still standardized
  • may be privately insured
A

conventional

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17
Q
  • potential saving in total interest paid
  • monthly mortgage payments are higher
  • lower degree of interest rate risk
  • generally charge a lower interest rate
A

15-year mortgage

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18
Q

A mortgage is ___ when the fixed principal and interest payments fully pay off the mortgage by its maturity date.

A

amortized

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19
Q
  • monthly payments
  • mortgage principle paid off generally over time
  • each payment pays accrued interest plus some principle
  • time value of money (FV = 0)
A

amortization

20
Q

A mortgage that locks in the borrower’s interest rate and thus the required monthly payment over the life of the mortgage, regardless of how market rates change.

A

fixed-rate mortgage

21
Q

A mortgage in which the interest rate is tied to some market interest rate. Thus, the required monthly payments can change over the life of the mortgage.

A

adjustable-rate mortgage (ARM)

22
Q
  • borrower pays fee up front (% of principle value)
  • lender lowers interest rate on loan
A

discount points
(One discount point paid up front is equal to 1 percent of the principal value of the mortgage)

23
Q

covers the issuer’s initial costs of processing the mortgage application and obtaining a credit report

A

application fee

24
Q

confirms the borrower’s legal ownership of the mortgaged property and ensures there are no outstanding claims against the property

A

title search

25
Q

protects the lender against an error in the title search

A

title insurance

26
Q

covers the cost of an independent appraisal of the value of the mortgaged property

A

appraisal fee

27
Q

covers the remaining costs of the mortgage issuer for processing the mortgage application and completing the loan

A

loan origination fee

28
Q

covers the costs of the closing agent who actually closes the mortgage

A

closing agent and review fees

29
Q

occurs when a mortgage borrower takes out a new mortgage uses the proceeds obtained to pay off the current mortgage

A

mortgage refinancing

(most often refinanced when a current mortgage has an interest rate that is higher than the current interest rate)

30
Q
  • loan which doesnt conform to standards set by agencies
  • ex: Fannie Mae / Freddie Mac
  • exceed the conventional mortgage conforming limits.
A

jumbo mortgage

31
Q

mortgage to a borrower with a ‘low’ credit rating, limited credit history or low assets/income relative to loan size

A

subprime mortgaes

32
Q
  • mortgage borrower receives regular monthly payments from a financial institution rather than making them
  • at maturity (or borrower dies), the borrower sells the property to retire the debt
A

reverse-annuity mortgage (RAM)

33
Q

Mortgages that are considered riskier than a prime mortgage and less risky than a subprime mortgage.

A

Alt-A mortgages

34
Q

Adjustable rate mortgages that offer the borrower several monthly payment options.

A

option ARMs

35
Q

Loans secured by a piece of real estate already used to secure a first mortgage
- still secured by property

A

second mortgages / home equity loans

36
Q

option where the borrower pays both principal and interest on the loan by making payments each month

A

30-year fully amortizing option ARM

37
Q

option where borrower pays a full principal and interest payment, but with a larger amount of principal paid each month
- this amt includes all of the interest charged on the loan for the previous month plus principal to pay off the loan
- accelerates amortization schedule

A

15 year fully amortizing payment option ARM

38
Q

The ability of a loan buyer to sell the loan back to the originator should it go bad.

A

recourse

39
Q

majority of secondary sales are for securitization, this creates ________

A

mortgage-backed securities

40
Q

why sell a mortgage? (2 reasons)

A
  • diversification and interest rate risk
  • immediate profit
41
Q

why buy a mortgage? (5 things)

A
  • low risk
  • large banks (foreign and domestic)
  • insurance companies
  • pension funds
  • closed end funds
42
Q

Mortgage-backed securities that __ __ promised payments of principal and interest on pools of mortgages created by financial institutions to secondary market participants holding interests in the pools.

A

pass-through mortgage securities

43
Q

A mortgage-backed bond issued in multiple classes or tranches.

A

collateralized mortgage obligation (CMO)

44
Q

A bond holder class associated with a CMO.

A

tranches

45
Q
A

FINN 3053 (14 decks)

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