Question 1

In contrast to conventional home loans, the interest-only balloon loan requires the borrower to pay off the loan with a "balloon" payment equal to the original balance after:

Accepted Answer

The interest-only balloon loan typically has a term of 5-7 years, after which the borrower is expected to make a large balloon payment to pay off the remaining balance. This type of loan often has lower monthly payments during the initial term, but can be risky if the borrower is unable to make the balloon payment when it comes due.

Question 2

Mortgage insurance rates vary with the perceived riskiness of the loan. Which of the following scenarios would result in a higher mortgage insurance premium?

Accepted Answer

A "cash-out" refinancing loan is where the borrower takes out a loan for more than the current mortgage balance and pockets the difference. This increases the perceived riskiness of the loan and therefore results in a higher mortgage insurance premium.

Question 3

The hybrid ARM attempts to balance the fixed payment desire of a borrower with the lender's desire to increase interest rates if market rates rise in the future. In its most common form, known as a 2-28, the hybrid ARM will have a fixed-interest rate for:

Accepted Answer

In a 2-28 hybrid ARM, the fixed interest rate period lasts for two years, after which the interest rate may adjust annually based on market rates.

Question 4

The Federal Housing Administration (FHA) insures loans made by private lenders that meet FHA's property and credit-risk standards. Which of the following statements concerning FHA insurance is true?

Accepted Answer

FHA insurance is paid by the borrower and protects the lender against loss due to borrower default. This provides an incentive for lenders to make loans to borrowers who may not meet conventional underwriting standards. The borrower pays an upfront premium at closing and a monthly premium (included in the mortgage payment) for the life of the loan.

Question 5

With the arrival of subprime mortgages in recent years, a new kind of "trigger" event became apparent in leading households to default. Which of the following trigger events is primarily associated with most defaults that have occurred during the most recent subprime mortgage crisis?

Accepted Answer

Mortgage payment spikes, often due to adjustable rate mortgages resetting to higher interest rates, have been a primary trigger for defaults during the subprime mortgage crisis.

Question 6

Since mortgages typically have multiple costs associated with them, a borrower may attempt to reduce these costs into a single measure in order to compare two or more mortgages. Which of the following measures is a popular tool for comparing the cost of several mortgages?

Accepted Answer

The annual percentage rate (APR) is a single measure that includes the interest rate, mortgage insurance, and other fees associated with the mortgage. It provides a more accurate comparison of the total cost of the mortgage than just looking at the contracted interest rate or upfront fees. The teaser rate is only an introductory rate and does not represent the total cost of the mortgage.

Question 7

It would be hard to overstate the importance of the Federal Housing Administration (FHA) in the history of housing finance. Which of the following instruments created by the FHA is considered the single most important financial instrument in modern housing finance?

Accepted Answer

The level-payment, fully amortizing loan created by the FHA is considered the single most important financial instrument in modern housing finance. This type of loan has a fixed interest rate and fixed monthly payments, which allows for predictability and stability in homeownership.

Question 8

Many older, retired households are considered "house poor." Which of the following forms of loans has been designed to help mitigate this problem by offering additional monthly income to these homeowners in exchange for a portion of their housing equity?

Accepted Answer

A reverse mortgage is specifically designed for older homeowners who are house rich but cash poor. It allows them to access the equity in their home by receiving additional monthly income in exchange for a portion of their equity. This can help alleviate financial stress and improve their quality of life. A PMM is a type of mortgage used to finance the purchase of a property and is not relevant to this scenario. A piggyback mortgage is a second mortgage used to avoid mortgage insurance, and a home equity loan is a lump sum loan that allows a homeowner to borrow against the equity in their home. Neither of these options provide additional monthly income to the homeowner in exchange for equity in their home.

Question 9

Which of the following types of institutions has historically been the largest purchaser of residential mortgages?

Accepted Answer

Government sponsored enterprises, such as Fannie Mae and Freddie Mac, have historically been the largest purchasers of residential mortgages. They were created by the government to increase access to affordable housing by buying mortgages from lenders and then bundling them into securities for investors. This allows lenders to free up capital and continue to make new loans, while investors receive a stream of income from the mortgage payments.

Question 10

In recent years, home equity loans have become a popular form of second mortgage. Their popularity has been a result of all of the following EXCEPT:

Accepted Answer

Home equity loans typically have longer terms than other consumer debt, not shorter terms. The other options are valid reasons why home equity loans have become popular.

Question 11

Mortgage loans made to borrowers with normal credit quality, but who lack the necessary documentation of their financial circumstances typically needed to meet conforming mortgage standards would most likely be considered:

Accepted Answer

Alt-A loans, also known as Alternative-A loans or "liar loans," are mortgage loans made to borrowers who have good credit scores but do not fully document their income and assets. These borrowers may be self-employed or have complex financial situations, and they may not be able to meet the strict documentation requirements of conforming mortgage loans. Alt-A loans are riskier than prime loans but less risky than subprime loans.

Question 12

Mortgage originators can either hold loans in their portfolios or sell them to investors. When a mortgage originator decides to sell mortgages to another institution, this transaction occurs in what is commonly referred to as the:

Accepted Answer

The secondary mortgage market is where mortgages are bought and sold by investors and institutions. This market allows mortgage originators to sell their loans and free up capital for further lending, while investors can purchase existing mortgages for investment purposes. The primary mortgage market refers to the initial origination of the loan, while the over-the-counter market is typically used for trading stocks and other securities. There is no specific market called the "loan origination market".

Question 13

A common criticism of the annual percentage rate (APR) is that it usually understates the true cost of borrowing. The APR may understate the cost of borrowing because it assumes:

Accepted Answer

The answer of A common criticism of the annual percentage...

Question 14

Lenders generally require private mortgage insurance (PMI) for conventional loans over 80 percent of the value of the security property. PMI protects a lender against which of the following?

Accepted Answer

PMI protects a lender against losses due to default on the loan, meaning that if the borrower stops making payments and eventually defaults, the lender will be protected by the insurance.

Question 15

Created by Congress to promote an active secondary market for home mortgages, Fannie Mae and Freddie Mac purchase loans that meet specific underwriting standards such as loan size, documentation, and payment to income ratio. The loans that Fannie Mae and Freddie Mac are eligible to purchase are commonly referred to as:

Accepted Answer

Loans that meet specific underwriting standards and are eligible for purchase by Fannie Mae and Freddie Mac are referred to as conforming conventional loans.

Question 16

Considered the most common type of home loan, which of the following refers to any standard home loan that is not insured or guaranteed by an agency of the U.S. government?

Accepted Answer

A conventional home loan refers to any standard home loan that is not insured or guaranteed by an agency of the U.S. government. The other options listed (B, C, and D) are specific types of government-backed loans.

Question 17

Since conforming loans can be much more readily bought and sold in the secondary mortgage market, they carry a(n) _______ interest rate than comparable nonconforming loans.

Accepted Answer

Conforming loans typically carry a lower interest rate than nonconforming loans because they meet the criteria for purchase by major financing agencies like Fannie Mae and Freddie Mac, making them more liquid and less risky for lenders.

Question 18

The refinancing decision is sometimes oversimplified into a few "rules of thumb" that a borrower uses in order to gauge its potential benefits. Which of the following methodologies is criticized for its inability to account for a variation in refinancing benefits due to cost or holding period differences?

Accepted Answer

The interest rate spread method is criticized for its inability to account for variations in refinancing benefits due to differences in costs or holding periods. It simply compares the current mortgage interest rate with the potential new rate without considering other financial factors.

Question 19

Mortgage originators often offer many types and forms of available residential loans as part of their mortgage menu. However, the predominant form of prime conventional mortgage remains the:

Accepted Answer

The fixed-rate level payment mortgage (LPM) is the most commonly used form of prime conventional mortgage. It offers the security of a fixed interest rate and level payments over the life of the loan, making it easier for borrowers to budget and plan for their monthly mortgage payments. The other options listed - adjustable rate mortgages, subprime mortgages, and alt-A mortgages - are either less common or are associated with higher levels of risk for borrowers.

Question 20

Federal Housing Administration (FHA) loans differ from conventional loans in a number of ways. All of the following statements regarding FHA loans are true EXCEPT:

Accepted Answer

FHA loans generally require lower credit scores than prime conventional loans, not higher. This is because the program is designed to help those with weaker financial circumstances access homeownership.

Quiz 10: Residential Mortgage Types and Borrower Decisions