Question 1

When the mortgage banker originates a home loan, she actually creates two assets: the loan and the servicing rights. When the mortgage bank sells the servicing right to the loan, it historically has had a value of:

Accepted Answer

Historically, the value of the servicing right has been 0.75-1.25 percent of the loan.

Question 2

The Dodd-Frank Act ushered in a new standard for home mortgage underwriting. Which of the following standards is now required of any lender when underwriting a home loan?

Accepted Answer

The Dodd-Frank Act established the ability-to-repay standard, which requires lenders to determine a borrower's ability to repay a mortgage loan. This includes considering factors such as income, assets, and debts, and verifying the information provided by the borrower. The ability-to-repay standard is intended to reduce the risk of default and ensure that borrowers are not given loans that they cannot afford to pay back.

Question 3

Utilizing the following information, calculate the housing expense ratio. Monthly Principal and interest on mortgage loan: $635; Monthly Tax and insurance payments into escrow: $125; Gross monthly income: $2,500

Accepted Answer

The answer of Utilizing the following information, calculate the housing...

Question 4

Let's suppose that a lender has established a 90 percent loan-to-value ratio cutoff as one of its primary underwriting criteria. If a borrower is willing to make a down payment of $125,000 on a home recently appraised at $550,000, which of the following best describes the lender's decision on whether or not to approve the loan along this dimension?

Accepted Answer

The lender approves the loan because the LTV ratio is less than 90 percent. The LTV ratio is calculated as the loan amount divided by the appraised value of the home. In this case, if the borrower makes a down payment of $125,000, the loan amount would be $425,000 ($550,000 - $125,000). The LTV ratio would be 77 percent ($425,000 / $550,000), which is less than the lender's 90 percent cutoff. Therefore, the loan would be approved based on this dimension.

Question 5

In the process of deciding whether to extend a mortgage loan to a prospective borrower, lenders typically examine three elements, more commonly referred to as the "3 C's." Which of the following metrics does a bank use to evaluate the collateral piece of the loan agreement?

Accepted Answer

The loan-to-value ratio (LTV) is a metric that evaluates the collateral piece of the loan agreement. It represents the percentage of the property's appraised value that the loan amount covers. The higher the LTV, the riskier the loan for the lender. A lower LTV provides more security for the loan since the property value covers a higher percentage of the loan. Therefore, the LTV is an essential factor for the lender to assess the loan's risk and decide whether to extend it to the borrower.

Question 6

A lender is considering whether to approve a mortgage loan on a home recently appraised at a value of $500,000. If the borrower is willing to make a down payment of $100,000, determine the loan-to-value ratio associated with this property.

Accepted Answer

The loan-to-value (LTV) ratio is calculated by dividing the mortgage loan amount by the appraised value of the property. In this case, the mortgage loan amount would be $500,000 - $100,000 = $400,000. So, the LTV ratio would be $400,000/$500,000 = 0.8 or 80%. Therefore, the best choice is D.

Question 7

In ascertaining whether a borrower has the ability to pay off his loan over time, a mortgage bank may rely on calculating a total debt ratio as part of its underwriting process. Utilizing the following information, calculate the total debt ratio. Monthly principal and interest on mortgage loan: $635, Monthly Tax and insurance payments into escrow: $125, Monthly Car lease payment (lease term is 3 years): $350, Gross monthly income: $2,500

Accepted Answer

To calculate the total debt ratio, we need to add up all of the borrower's monthly debt payments and divide by their gross monthly income.

Monthly debt payments: $635 (mortgage) + $125 (tax and insurance) + $350 (car lease) = $1,110

Total Debt Ratio: ($1,110 / $2,500) x 100% = 44.4%

Therefore, the total debt ratio is 44.4%, which is option C. This means that almost half of the borrower's monthly gross income is going towards debt payments. This may be a concern for the mortgage bank when assessing the borrower's ability to pay off their loan over time.

Question 8

The traditional approach to loan underwriting has virtually been replaced by an automated underwriting process that involves a statistically derived equation to determine the level of default risk associated with a loan application. All of the following statements regarding the automated underwriting process are true EXCEPT:

Accepted Answer

The opposite is true. The marginal cost per loan underwritten using the automated process is significantly lower than traditional underwriting.

Question 9

Suppose an institution has purchased a $250,000 mortgage loan from the loan originator and wishes to create a mortgage pass-through security. In doing so, this institution will generate revenue by charging a servicing fee of 35 basis points. If the monthly mortgage payment on the loan is $1,250, how much income is passed through to the investor in the mortgage pass through each month (rounded to the nearest dollar)?

Accepted Answer

The servicing fee is calculated as 35 basis points of the monthly mortgage payment. 1 basis point is 1/100th of a percent, so 35 basis points is 35/10000 or 0.0035. The servicing fee is $1,250 * 0.0035 = $4.375. The income passed through to the investor each month is the monthly mortgage payment minus the servicing fee: $1,250 - $4.375 = $1,245.625, which rounds to $1,177.

Question 10

Loan servicing includes a number of responsibilities such as collecting monthly mortgage payments from the borrower, remitting principal and interest payments to investors, ensuring sufficient escrow payments are being made by the borrower, and managing default if it should arise. In exchange for these services, mortgage bankers receive a fee. If the outstanding loan balance is $250,000 and the annual servicing fee is 0.35%, what is the monthly fee for servicing the loan?

Accepted Answer

First, we need to calculate the annual servicing fee: 
0.35% of $250,000 = $875

Then, we need to divide the annual fee by 12 to get the monthly fee: 
$875 ÷ 12 = $72.92

Therefore, the monthly fee for servicing the loan is $72.92, which is option A.

Question 11

When the contract rate at closing is less than the current market rate (i.e., interest rates have increased since the time of the loan commitment), the mortgage banker will have to sell the newly originated loan at a discount. This scenario best depicts the mortgage banker's exposure to which of the following risks?

Accepted Answer

Interest rate risk refers to the risk that changes in interest rates will affect the value of financial instruments, such as loans. In this scenario, the mortgage banker is exposed to interest rate risk because the increase in rates has caused the value of the newly originated loan to decrease, resulting in the need to sell it at a discount in order to clear the inventory. Fallout risk refers to the risk that a borrower will cancel or withdraw their loan application after pre-approval, default risk refers to the risk that a borrower will default on their loan payments, and liquidity risk refers to the risk of not having enough cash or liquid assets to meet obligations when they become due. While these risks may be present in the mortgage banking industry, they are not the primary risk being depicted in this scenario.

Quiz 11: Sources of Funds for Home Mortgages

When the mortgage banker originates a home loan, she actually creates two assets: the loan and the servicing rights. When the mortgage bank sells the servicing right to the loan, it historically has had a value of:

The Dodd-Frank Act ushered in a new standard for home mortgage underwriting. Which of the following standards is now required of any lender when underwriting a home loan?

Utilizing the following information, calculate the housing expense ratio. Monthly Principal and interest on mortgage loan: $635; Monthly Tax and insurance payments into escrow: $125; Gross monthly income: $2,500

In the process of deciding whether to extend a mortgage loan to a prospective borrower, lenders typically examine three elements, more commonly referred to as the "3 C's." Which of the following metrics does a bank use to evaluate the collateral piece of the loan agreement?

A lender is considering whether to approve a mortgage loan on a home recently appraised at a value of $500,000. If the borrower is willing to make a down payment of $100,000, determine the loan-to-value ratio associated with this property.