The US Banking System 3e by Center for Financial Training

The US Banking System 3e by Center for Financial Training

CHAPTER 08—MORTGAGES

1. A mortgage is the longest and largest debt most people will ever incur.

a.

True

b.

False

ANSWER:

True

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.2.2 – LO: 8.2.2

2. The “drawing documents” step in the approval process for a mortgage loan involves signing the documents that transfer the property from the seller to the buyer.

a.

True

b.

False

ANSWER:

False

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.2.2 – LO: 8.2.2

3. Interest rates are usually lower for fixed rate mortgages than for other types.

a.

True

b.

False

ANSWER:

False

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.2.2 – LO: 8.2.2

4. A shared appreciation mortgage (SAM) is a mortgage loan tied to the appreciated value of a property.

a.

True

b.

False

ANSWER:

True

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.2.2 – LO: 8.2.2

5. A larger down payment on a home lowers the amount of the monthly payment.

a.

True

b.

False

ANSWER:

True

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.2.1 – LO: 8.2.1

6. Private mortgage insurance protects the lender against loan default; it typically is not required for borrowers whose down payment is 10 percent or more.

a.

True

b.

False

ANSWER:

False

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.2.1 – LO: 8.2.1

7. The first step in the mortgage approval process is documentation.

a.

True

b.

False

ANSWER:

False

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.2.2 – LO: 8.2.2

8. The Gramm-Leach-Bliley Act requires that financial institutions protect the privacy of consumers.

a.

True

b.

False

ANSWER:

True

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.3.1 – LO: 8.3.1

9. Qualifying veterans may get government-backed mortgage loans with low down payments through the Department of Veteran’s Affairs.

a.

True

b.

False

ANSWER:

True

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.4.2 – LO: 8.4.2

10. Lowered lending criteria for home mortgages benefited society as the lowered criteria allowed more consumers to achieve their goal of homeownership.

a.

True

b.

False

ANSWER:

False

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.5.2 – LO: 8.5.2

11. Which of the following components of a fixed rate mortgage do not change?

a.

payments on the loan

b.

interest rate

c.

terms

d.

all of the above

ANSWER:

d

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.1.1 – LO: 8.1.1

12. The rate to which a lender’s interest rate is tied is called the

a.

formula.

b.

index.

c.

adjustment interval.

d.

periodic cap.

ANSWER:

b

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.1.2 – LO: 8.1.2

13. A point is a value equal to ____________________ of a mortgage loan.

a.

1 percent

b.

2 percent

c.

5 percent

d.

10 percent

ANSWER:

a

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.1.2 – LO: 8.1.2

14. A reverse mortgage is repaid

a.

over the term of the loan, typically 30 years.

b.

in one single large payment at a specified point.

c.

when the borrower dies.

d.

by the bank to the borrower.

ANSWER:

c

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.1.2 – LO: 8.1.2

15. Generally speaking, housing costs should not exceed ____________________ of gross monthly income.

a.

10 to 15 percent

b.

25 to 28 percent

c.

36 to 40 percent

d.

50 percent

ANSWER:

b

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.2.1 – LO: 8.2.1

16. The final step of the mortgage approval process is

a.

closing.

b.

recording.

c.

drawing documents.

d.

underwriting.

ANSWER:

b

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.2.2 – LO: 8.2.2

17. The ____________________ requires banks to record and report data on home lending in order to identify possible discriminatory patterns.

a.

Equal Credit Opportunity Act

b.

Community Reinvestment Act

c.

Home Mortgage Disclosure Act

d.

Home Ownership and Equity Protection Act

ANSWER:

c

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.3.2 – LO: 8.3.2

18. The Real Estate Settlement Procedures Act was enacted

a.

to protect consumers from hidden costs at closing time.

b.

to protect consumers against predatory lending.

c.

to promote the informed use of consumer credit.

d.

to require banks to document their lending decisions and demonstrate an effort to serve their local communities.

ANSWER:

a

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.3.2 – LO: 8.3.2

19. Which of the following statements about HOEPA loans is NOT true?

a.

Lenders must make disclosures three days before closing.

b.

Lenders are prohibited from charging an APR that is 10 points higher than a rate on a Treasury Bill.

c.

Lenders may not require balloon payments in less than five years on most loans.

d.

Lenders may not make loans that do not adequately consider the borrower’s ability to repay.

ANSWER:

b

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.3.2 – LO: 8.3.2

20. Which of the following contributed to the mortgage crisis?

a.

some countries had new levels of wealth available for investment

b.

a shift from using local deposits to finance mortgages to using the bond markets to finance mortgages

c.

a federal funds rate of 5%

d.

a and b only

e.

b and c only

f.

a and c only

g.

all of the above

ANSWER:

d

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.5.2 – LO: 8.5.2

21. A(n) ____________________ is a note, usually long-term, secured by real property.

ANSWER:

mortgage

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.1.1 – LO: 8.1.1

22. A fixed rate mortgage is also known as a(n) ____________________ mortgage.

ANSWER:

conventional

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.1.2 – LO: 8.1.2

23. A type of fixed rate mortgage in which the entire remaining balance of the loan is due in one single large payment is called a(n) ____________________ mortgage.

ANSWER:

balloon

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.1.2 – LO: 8.1.2

24. In a(n) ____________________ mortgage, the borrower prepays part of the interest in order to get a lower rate.

ANSWER:

buy-down

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.1.2 – LO: 8.1.2

25. The difference between what an item is worth and what is owed on it is called ____________________.

ANSWER:

equity

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.1.2 – LO: 8.1.2

26. The ____________________ cap is the specified overall maximum or minimum rate of an ARM, regardless of index.

ANSWER:

lifetime

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.1.2 – LO: 8.1.2

27. Most lenders require an amount called ____________________ to be paid to them in advance; the lenders pay real estate taxes from this fund.

ANSWER:

escrow

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.2.1 – LO: 8.2.1

28. ____________________ mortgage insurance (PMI) protects the lender against loan default.

ANSWER:

Private

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.2.1 – LO: 8.2.1

29. The refusal of banks to lend to residents of certain neighborhoods is called ____________________.

ANSWER:

redlining

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.3.2 – LO: 8.3.2

30. The Federal Home Loan Mortgage Corporation is better known as ____________________.

ANSWER:

Freddie Mac

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.4.2 – LO: 8.4.2

31. The highest bond rating a security can receive is a(n) ____________________ rating.

ANSWER:

AAA

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.5.2 – LO: 8.5.2

32. _________________________ occurs when the amount owed on a home is more than the current value of the home.

ANSWER:

Negative equity

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.5.2 – LO: 8.5.2

33. What is the value of 3 points on a mortgage loan of $150,000?

ANSWER:

$4,500

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.1.2 – LO: 8.1.2

34. When Sylvia bought her house two years ago, it was worth $75,000. The value of the house has appreciated 4 percent in each of the past two years. What is Sylvia’s house worth now?

ANSWER:

$81,120

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.1.2 – LO: 8.1.2

35. Four years ago, Mavis and Lester purchased a $200,000 home with $25,000 down. The remaining principal on the home is $165,000. Suppose the home has appreciated in value during that time to $250,000. Find Mavis and Lester’s equity in the home.

ANSWER:

$85,000

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.1.2 – LO: 8.1.2

36. Calculate the monthly cost of private mortgage insurance (PMI), using the typical PMI rate of 1/2 of 1 percent, for a principal balance of $165,000.

ANSWER:

$68.75

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.2.1 – LO: 8.2.1

37. Guardian Bank will lend no more than 95 percent of the appraised value of a house to a prospective buyer. The house Yoko and Akira wish to purchase has been appraised at $110,000. What is the maximum amount that Guardian Bank would be willing to lend them?

ANSWER:

$104,500

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.1.2 – LO: 8.1.2

38. What is a foreclosure?

ANSWER:

A foreclosure is a court-ordered sale of property whose mortgage has not been paid.

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.1.1 – LO: 8.1.1

39. What is the adjustment interval on an ARM?

ANSWER:

The adjustment interval is the length of time that a given rate and payment are in effect.

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.1.2 – LO: 8.1.2

40. What are the four components of PITI?

ANSWER:

The four components of PITI are principal, interest, taxes, and insurance.

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.2.1 – LO: 8.2.1

41. What is the loan-to-value relationship?

ANSWER:

The loan-to-value relationship is the value of the loan compared to the value of the asset.

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.2.2 – LO: 8.2.2

42. What constitutes a high-interest loan, as defined by HOEPA?

ANSWER:

A loan is considered high-interest if its annual percentage rate is 10 points higher than a rate on a Treasury Bill for the same length of time. Loans with noninterest fees of more than $465 or 8 percent of the loan value are also HOEPA loans.

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.3.2 – LO: 8.3.2

43. What is the Federal National Mortgage Association?

ANSWER:

The Federal National Mortgage Association is a government-chartered corporation that buys mortgages from the originating institutions and either keeps them or exchanges them for securities, which it guarantees.

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.4.2 – LO: 8.4.2

44. Name five types of loans that used lowered lending criteria and contributed to the mortgage crisis.

ANSWER:

Interest-only loans, Stated Income Verified Assets loans (SIVA), Stated Income Stated Asset loans (SISA), No Income No Asset loans (NINA), and No Income, No Asset, No Employment loans

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.5.2 – LO: 8.5.2

45. During the recent mortgage crisis, what kept struggling homeowners from using the help of credit counselors to renegotiate the interest rates on their homes?

ANSWER:

Many mortgages had been sold multiple times and were part of a large pool of mortgages. Sometimes it was hard to determine who was holding a mortgage. If the identity of the mortgage holder was not clear, then it was difficult to renegotiate interest rates on a mortgage.

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.5.2 – LO: 8.5.2

46. Are interest rates for fixed rate mortgages usually higher or lower than for other types? Why?

ANSWER:

Interest rates are usually higher for fixed rate mortgages because of the risk for the bank. If interest rates rise, the holder of the note is making money on a less-than market rate.

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.1.1 – LO: 8.1.1

47. What forms do home equity loans usually take? How is a home equity loan different from a typical consumer loan?

ANSWER:

Home equity loans usually take one of two forms: either a simple loan (a single disbursement of money for the borrowed amount) or as a line of credit. A home equity loan differs from a typical consumer loan because it is a second mortgage and is secured by the borrower’s home.

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.1.2 – LO: 8.1.2

48. Why are lenders interested in the appraised value of a property before deciding whether or not to grant a mortgage loan?

ANSWER:

Most lenders prefer to lend no more than 95 percent of the appraised value of a property so that their risk is supported. The value of the property may determine whether the mortgage is granted, even if you are willing to pay the lender more than the property is “really” worth.

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.2.2 – LO: 8.2.2

49. What are the requirements for lenders who wish to participate in the Fannie Mae program?

ANSWER:

Lenders must be licensed to originate mortgages, have a net worth of at least $250,000, be bonded and insured, and have written policies for underwriting and loan servicing.

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.4.2 – LO: 8.4.2

50. Why have mortgages traditionally been considered an attractive investment for lenders?

ANSWER:

By carefully prequalifying buyers and making sure they purchased a home within their budget, lenders could be fairly certain that loans would be repaid in a timely fashion. When the value of home appreciated, the lender’s exposure to defaulted mortgages was mitigated by the increased value of the house they were left to sell.

POINTS:

1

LEARNING OBJECTIVES:

BNKG.CFFT.3.LO: 8.5.1 – LO: 8.5.1