General Mortgage Knowledge-Prep Xl Flashcards
Yield spread premiums (YSP) compensate:
A.A borrower for obtaining a loan
B.A lender for the transfer of servicing rights
C.A title company for issuing title insurance
D.A borrower for closing a loan above par
The correct answer is:
D. A borrower for closing a loan above par**
Explanation:
Yield Spread Premium (YSP):
- A Yield Spread Premium is a payment made by a lender to a mortgage broker or a borrower for closing a loan at an interest rate higher than the par rate (the rate for which the borrower qualifies based on their creditworthiness and financial situation).
- In the context of borrowers, when a loan is closed above par (i.e., at a higher interest rate), the borrower may receive a credit toward closing costs, reducing the upfront expenses they need to pay out of pocket.
Therefore, YSP serves as compensation for closing a loan above the par rate, providing a financial benefit to the borrower by reducing their initial costs.
(The answer is a borrower for closing a loan above par. The yield spread premium compensates a borrower for closing a loan at an interest rate above the par rate. The par rate is the interest rate that would be charged without any yield spread premiums to increase it or discount points to decrease it. Yield spread premiums are now more commonly called “borrower credits.)
The term “escrow analysis” refers to:
A.The calculation used to determine how much can be held in an escrow account
B.The calculation used to determine whether or not a mortgage qualifies as a high-cost loan under section 32
C.The process used to reconcile differences in comparables on an appraisal
D.The process used to determine whether or not a Loan Estimate is within tolerance levels
The answer is the calculation used to determine how much can be held in an escrow account. An escrow analysis is the accounting method used to determine the adequacy of the funds held in an escrow account. The loan servicer must use an aggregate escrow analysis accounting method in making that determination.
In a residential mortgage loan transaction, where is any yield spread premium disclosed?
A.In the Loan Estimate only
B.In both the Loan Estimate and the Closing Disclosure
C.In the Closing Disclosure only
D.In any promissory note
The answer is in both the Loan Estimate and the Closing Disclosure. Yield spread premiums (YSPs) are points credited for an interest rate above the par rate. No-closing cost loans result from applying the YSP to pay the borrower’s closing costs so that they need not be paid up front. Any YSP paid must be disclosed on both the Loan Estimate and the Closing Disclosure as a lender credit. A creditor may also include any excess charge by it as a lender credit.
Which of the following statements most accurately describes Freddie Mac?
A.A government agency which was created to facilitate home ownership through the offering of conventional loan programs for middle-income families
B.A privately-held corporation with no government affiliation which lends money for conventional mortgages
C.A publicly-traded private entity which is government sponsored and was created in order to facilitate home ownership
D.A government agency which was created in order to facilitate home ownership, especially for lower-income families, through the offering of FHA and other government programs
The answer is a publicly-traded private entity which is government sponsored and was created in order to facilitate home ownership. Freddie Mac and Fannie Mae are government-sponsored enterprises which engage in business on the secondary mortgage market, buying conforming conventional loans, FHA-insured loans, and VA- and USDA-guaranteed loans. Their purchase of such loans provides income to lenders, reducing the need for lenders to hold substantial funds for mortgage loans.
Which of the following best describes amortization?
A.Paying insufficient principal and interest monthly to pay off the loan at the end of the loan term
B.Failing to pay the interest due each month on a loan
C.Paying only the interest due on a loan each month
D.Paying enough principal and interest monthly to pay off the loan by the end of the loan term
The answer is paying enough principal and interest monthly to pay off the loan by the end of the loan term. Amortization is the process of paying off a loan, both principal and interest, by gradually reducing the balance through a series of installment payments. A fully-amortizing mortgage provides for periodic payments that repay the loan in its entirety by the end of the mortgage term.
Which of the following occurs in the secondary mortgage market?
A.Mortgage brokers negotiating a loan for a borrower
B.Fannie Mae pooling loans for sale on the securities market
C.Borrowers applying for a loan
D.A mortgage banker referring service providers
The answer is
Fannie Mae pooling loans for sale on the securities market. After a loan, a lender can hold it, bearing the risks itself; warehouse it, using it as collateral for loans the lender needs from other lenders; sell it to another lender or investor; or use it to back securities sold to investors. These activities occur on the secondary mortgage market. When Fannie Mae pools mortgage loans for sale as mortgage-backed securities, it is engaging in business on the secondary mortgage market.
explain this “Fannie Mae pooling loans for sale on the securities market. After a loan, a lender can hold it, bearing the risks itself; warehouse it, using it as collateral for loans the lender needs from other lenders; sell it to another lender or investor; or use it to back securities sold to investors. These activities occur on the secondary mortgage market. When Fannie Mae pools mortgage loans for sale as mortgage-backed securities, it is engaging in business on the secondary mortgage market.”
Certainly! Here’s an explanation of the process described in your statement:
Secondary Mortgage Market Overview
The secondary mortgage market is where existing mortgage loans are bought and sold by lenders and investors. This market allows lenders to manage their risks and liquidity by transferring the ownership of loans to other financial entities. Here’s a breakdown of the concepts mentioned:
-
Loan Origination and Primary Market:
- When a borrower takes out a mortgage loan, it is initially created in the primary mortgage market. This is the direct interaction between the borrower and the lender (such as a bank or mortgage company).
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Lender’s Options After Loan Origination:
- Hold the Loan: The lender keeps the loan on its books, receiving payments from the borrower over time. This involves bearing the risk of the borrower defaulting.
- Warehouse the Loan: The lender uses the loan as collateral to obtain short-term financing from other lenders, typically through a process called warehousing.
- Sell the Loan: The lender sells the loan to another lender or investor. This frees up capital for the lender to make additional loans.
- Back Securities with the Loan: The lender pools the loan with others to create mortgage-backed securities (MBS), which are sold to investors in the secondary market.
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Fannie Mae’s Role:
- Fannie Mae is a government-sponsored enterprise (GSE) that operates in the secondary mortgage market.
- It buys mortgages from lenders, pooling them together to create mortgage-backed securities.
- These securities are then sold to investors, providing lenders with fresh capital to issue new loans.
Benefits of the Secondary Mortgage Market
- Risk Management: By selling loans, lenders transfer the risk of default to investors.
- Liquidity: Selling loans and securities provides lenders with capital to fund new loans.
- Investment Opportunities: Mortgage-backed securities offer investors a way to invest in real estate without directly owning property.
Summary
When Fannie Mae pools mortgage loans and sells them as securities, it is facilitating the flow of capital and risk management in the secondary mortgage market. This process helps stabilize the mortgage industry by providing lenders with liquidity and enabling investors to participate in the real estate market. This system ultimately supports the availability and affordability of mortgage financing for borrowers.
Finance charges which are paid separately before or at the time of closing are considered to be:
A.Prepaid finance charges
B.P.O.C. charges
C.Third-party fees
D.Periodic interest charges
The answer is prepaid finance charges. A prepaid finance charge is any finance charge paid separately, in cash or by check, before or at consummation of the transaction or withheld from the proceeds of the loan at any time. It is a direct loan charge paid by the borrower and is included in the calculation of the annual percentage rate.
Prepaid Finance Charges Explained
Definition:
Prepaid finance charges are fees that a borrower pays upfront or at the time of closing a loan. These charges can also be deducted from the loan proceeds. They are part of the total cost of borrowing money and are considered when calculating the loan’s annual percentage rate (APR).
Key Points:
1. Types of Prepaid Finance Charges: * Origination Fees: Charges by the lender for processing the loan application. * Discount Points: Fees paid to reduce the interest rate on the loan (each point typically costs 1% of the loan amount). * Underwriting Fees: Costs associated with the lender’s evaluation of the loan application. * Processing Fees: Fees for handling the paperwork and logistics of the loan. * Private Mortgage Insurance (PMI) Premiums: If applicable, PMI may be required to secure the loan if the down payment is less than 20% of the home’s purchase price. 2. Payment Methods: * Paid Separately: The borrower can pay these charges in cash or by check before or at the closing of the loan. * Withheld from Proceeds: Alternatively, these charges can be deducted from the loan amount before disbursement. 3. Impact on Loan Costs: * Upfront Costs: Prepaid finance charges increase the initial cost to the borrower, as they must be paid or deducted at closing. * APR Calculation: These charges are included in the calculation of the APR, which is a comprehensive measure of the loan’s cost, including both interest and fees. The APR provides borrowers with a way to compare the cost of loans that have different interest rates and fee structures.
Importance of Understanding Prepaid Finance Charges
* Cost Comparison: Knowing the prepaid finance charges helps borrowers compare different loan offers more accurately. A loan with a low-interest rate but high prepaid charges might be more expensive than a loan with a higher interest rate and lower charges. * Budget Planning: Understanding these charges is essential for financial planning, as they affect the amount of money needed at closing and the overall cost of the loan.
Summary
Prepaid finance charges are upfront costs associated with securing a loan. They include various fees and are factored into the APR, impacting the overall cost of borrowing. Borrowers should carefully consider these charges when evaluating loan offers to ensure they understand the true cost of the loan.
If a conventional loan goes into default, is foreclosed upon, and causes the lender to lose money, which of the following would possibly reimburse the lender for the loss?
A.Mortgage insurance company
B.FHA
C.Fannie Mae
D.Hazard insurance company
The answer is mortgage insurance company. If a conventional loan goes into default and is foreclosed upon and the loan was covered by mortgage insurance, that insurance would reimburse the lender for some or all of its loss.
A mortgage lender closes a mortgage in their own name, funding the loan through a warehouse line. The lender does not act as a servicer, but sells the servicing rights along with the mortgage asset. When the lender sells the servicing rights in the secondary market, they receive compensation from the purchasing entity. Which of the following terms best describes this compensation?
A.Yield spread premium (YSP)
B.Back-end pricing
C.Service release premium (SRP)
D.Premium pricing
The answer is Service release premium (SRP). If the loan is sold on the secondary market, the purchaser will likely pay a premium (or take a discount) for the spread between the interest rate in the loan and the par interest rate.
It is based on the loan size and note interest rate. If a loan closed at 5.5% and the par rate to purchasers was 5.25%, the purchaser may have to pay one point to cover the 0.25% difference in the rates. This premium or discount is not disclosed in the Closing Disclosure and therefore does not affect the borrower, because the sale of the loan in the secondary market occurs after closing. A lender selling the loan and servicing rights may also receive a premium based on the purchaser’s value of the opportunity to collect payments, hold escrow, and otherwise realize servicing income. This is called the service release premium.
Service Release Premium (SRP) Explained
Definition:
The Service Release Premium (SRP) is a payment made to a lender when they sell a loan and its servicing rights to another lender or investor on the secondary market. This premium compensates the original lender for the value of transferring the servicing rights, which includes tasks such as collecting payments, managing escrow accounts, and handling customer service for the loan.
Key Points:
1. Secondary Market Transactions: * After a loan is originated, lenders have the option to sell it on the secondary mortgage market. This market allows lenders to manage their risk and liquidity by selling loans to other financial entities. * When a loan is sold, the purchaser may pay a premium or take a discount based on the interest rate spread between the loan and the prevailing market (par) interest rate. 2. Interest Rate Spread: * Par Interest Rate: The market interest rate at which a loan is sold without a premium or discount. * If the loan’s interest rate is higher than the par rate, the purchaser might pay a premium. Conversely, if the loan’s rate is lower, a discount might be applied. * For example, if a loan closes at 5.5% while the par rate is 5.25%, the purchaser might pay one point to cover the 0.25% difference. 3. Servicing Rights: * The servicing rights include responsibilities such as collecting monthly payments from borrowers, managing escrow accounts for taxes and insurance, and providing customer service. * These rights have value because they generate income for the servicer through fees collected as part of the loan payments. 4. Service Release Premium (SRP): * When a lender sells the servicing rights along with the loan, they may receive an SRP. This is a payment reflecting the value of transferring the servicing rights to the new lender or servicer. * The SRP is calculated based on factors such as the loan size, the interest rate, and the expected profitability of servicing the loan. 5. Impact on Borrowers: * The SRP is not disclosed to the borrower and does not affect the borrower’s costs, as it is part of the transaction between lenders on the secondary market. * The sale of the loan and servicing rights typically occurs after the loan has closed, so it does not change the terms or conditions agreed upon by the borrower.
Summary
The Service Release Premium (SRP) is a payment made to a lender when they sell a loan and its servicing rights on the secondary market. It reflects the value of transferring the responsibility of servicing the loan to another entity. This transaction is beneficial for lenders as it allows them to manage liquidity and risk, and it does not impact the borrower directly since it occurs after the loan closing and is not disclosed in the Closing Disclosure
Which of the following lists contains terms which are all included in APR calculations?
A.Origination fee, appraisal fee, flood certification fee, and processing fee
B.Origination fee, per-diem interest, tax service fee, and discount points
C.Buydown fee, credit report fee, UFMIP, and closing fee
D.Title insurance fee, processing fee, warehouse fee, and lender courier fee
The answer is :
origination fee, per-diem interest, tax service fee, and discount points. Each of the following is included in the calculation of the annual percentage rate: the origination fee, per-diem interest, tax service fee, and discount points. Other items which may be included in the calculation of the APR include mortgage broker fees, credit insurance premiums (in certain cases), and fees charged by a third-party settlement service provider if the lender requires the particular services or keeps a portion of the charge.
Explain this :
origination fee, per-diem interest, tax service fee, and discount points. Each of the following is included in the calculation of the annual percentage rate: the origination fee, per-diem interest, tax service fee, and discount points. Other items which may be included in the calculation of the APR include mortgage broker fees, credit insurance premiums (in certain cases), and fees charged by a third-party settlement service provider if the lender requires th
Understanding the Components
1. Origination Fee: * This is a fee charged by the lender for processing a new loan application. It covers the lender’s administrative costs and is usually expressed as a percentage of the loan amount. * Impact on APR: Since it is a cost associated with obtaining the loan, it is included in the APR calculation, making the APR higher than the nominal interest rate. 2. Per-Diem Interest: * This is the interest that accrues on the loan on a daily basis from the closing date until the first monthly payment is due. * Impact on APR: Since per-diem interest is an upfront cost paid at closing, it is included in the APR calculation to reflect the true cost of borrowing over the term of the loan. 3. Tax Service Fee: * A fee charged to ensure that property taxes are paid on time and in full, protecting the lender’s investment in the property. * Impact on APR: If the lender requires this service, the fee is included in the APR, contributing to a more comprehensive view of the loan’s cost. 4. Discount Points: * These are optional fees paid by the borrower at closing to reduce the loan’s interest rate, typically costing 1% of the loan amount per point. * Impact on APR: As prepaid interest, discount points are factored into the APR calculation, as they affect the overall cost of the loan.
Additional Components Potentially Included in APR:
1. Mortgage Broker Fees: * Fees paid to a broker who helps arrange the mortgage loan. If the broker’s services are required by the lender, these fees are included in the APR. 2. Credit Insurance Premiums: * Premiums for insurance that pays off the loan in the event of the borrower’s death or disability. If the lender requires it as a condition of the loan, these premiums are included in the APR. 3. Third-Party Settlement Service Provider Fees: * Fees charged by third-party services required by the lender (e.g., appraisal, credit report fees). If the lender mandates specific services and retains part of the charge, these are included in the APR.
Annual Percentage Rate (APR) Explained
* Definition: The APR is a comprehensive measure of the cost of borrowing, expressed as an annual percentage. It includes the interest rate plus certain fees and charges associated with the loan. * Purpose: The APR provides borrowers with a standardized way to compare the cost of different loans, as it reflects both the interest rate and additional costs. * Importance: A higher APR indicates a higher cost of borrowing, helping borrowers understand the true financial implications of a loan beyond just the nominal interest rate.
Summary
The origination fee, per-diem interest, tax service fee, and discount points are key components included in the APR calculation. These costs, along with other possible fees, help provide a more accurate representation of the total cost of borrowing, allowing borrowers to make informed comparisons between different loan options. Understanding the APR helps borrowers assess the full financial impact of a loan, beyond just the advertised interest rate.
This is a report issued by a title company related to a request to issue a title insurance policy.
A.Recorded lien
B.Preliminary title report
C.Encumbrance request
D.Title defect
The answer is preliminary title report. A preliminary title report is a report issued by a title company related to a request to issue a title insurance policy.
The acronym COFI can best be described as:
A. A popular fixed-rate, low-interest mortgage product
B. A popular index used for adjustable-rate mortgages
C. A popular margin used for adjustable-rate mortgages
D. A popular start rate used for adjustable-rate mortgages
B. A popular index used for adjustable-rate mortgages
Explanation:
COFI (Cost of Funds Index):
* The Cost of Funds Index is an index commonly used to determine interest rate changes for adjustable-rate mortgages (ARMs). It reflects the weighted average cost of funds acquired by financial institutions, such as savings and loan associations, to support their lending operations.
Key Points about COFI:
1. Purpose in ARMs: * COFI is used as a benchmark to adjust the interest rates on adjustable-rate mortgages. Lenders use COFI to determine how much the interest rate on an ARM should change at each adjustment period. 2. Calculation: * COFI is calculated based on the interest expenses paid by banks and savings institutions to obtain funds, including interest paid on savings accounts, time deposits, and other borrowing costs. * It is published monthly by the Federal Home Loan Bank of San Francisco. 3. Regional Influence: * The most well-known COFI is the 11th District COFI, which reflects the cost of funds for financial institutions in the 11th Federal Home Loan Bank District, covering Arizona, California, and Nevada. 4. Impact on Borrowers: * COFI is a relatively stable index compared to others, such as the London Interbank Offered Rate (LIBOR) or the Prime Rate, which means interest rate adjustments tied to COFI may not fluctuate as dramatically. 5. Benefits: * Using COFI can provide a level of predictability for borrowers with ARMs, as the index tends to move slowly in response to economic changes.
Summary
The Cost of Funds Index (COFI) is a widely used index for adjusting interest rates on adjustable-rate mortgages. It reflects the average cost that financial institutions incur to acquire funds and provides a benchmark for determining rate changes in ARMs. Choosing an ARM tied to COFI can offer borrowers a measure of stability in their mortgage payment
The acronym COFI can best be described as:
A.A popular fixed-rate, low-interest mortgage product
B.A popular index used for adjustable-rate mortgages
C.A popular margin used for adjustable-rate mortgages
D.A popular start rate used for adjustable-rate mortgages
The answer is a popular index used for adjustable-rate mortgages. “COFI” stands for “Cost of Funds Index,” a popular index used when setting the interest rate on some adjustable-rate mortgages.
