BANKING

Chapter 7 Study GuideTest on Tuesday, May 17, 2005

Mortgages

True/False

  • A borrower can use mortgaged property before the debt is paid in full.
  • A larger down payment on a home lowers the cost of the monthly payment.
  • A mortgage is the longest and largest debt most people will ever incur.
  • A shared appreciation mortgage is another form of consumer loan tied to the appreciated value of a property.
  • Any escrow surplus of more than $50 must be returned to the borrower.
  • Interest rates are usually higher for fixed rate mortgages than for other types.
  • Private mortgage insurance protects the lender against loan default; it is not typically required for borrower whose down payment if 20 percent or greater.
  • Qualifying veterans may get government-backed mortgage loans with low down payments through the Department of Veteran’s Affairs.
  • The first step in the mortgage approval process is the application.
  • The Gramm-Leach-Bliley Act requires that financial institutions protect the privacy of consumers.

Multiple Choice

  • A point is a value equal to 1 percent of a mortgage loan.
  • A reverse mortgage is repaid when the borrower dies.
  • Generally speaking, housing costs should not exceed 25 to 28 percent of gross monthly income.
  • The final step of the mortgage approval process is recording.
  • The following are facts about HOEPA loans: Lenders must make disclosures three days before closing; lenders may not require balloon payments in less than five years on most loans; and lenders may not make loans that do not adequately consider the borrower’s ability to repay.
  • The Home Mortgage Disclosure Act requires banks to record and report data on home lending in order to identify possible discriminatory patterns.
  • The payments, interest rate, and terms do not changed on a fixed rate mortgage.
  • The rate to which a lender’s interest rate is tied is called the index.
  • The Real Estate Settlement Procedures Act was enacted to protect consumers from hidden costs at closing time.
  • Today the home ownership rate in the United States is about 68 percent.

Completion

  • A fixed rate mortgage is also known as a conventional mortgage.
  • A mortgage is a note, usually long-term, secured by real property.
  • 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 balloon mortgage.
  • In a buy-down mortgage, the borrower prepays part of the interest in order to get a lower rate.
  • Most lenders require an amount call escrow to be paid to them in advance; the lenders pay real estate taxes from this fund.
  • Private mortgage insurance (PMI) protects the lender against loan default.
  • The difference between what an item is worth and what is owed on it is called equity.
  • The Federal Home Loan Mortgage Corporation is better known as Freddie Mac.
  • The lifetime cap is the specified overall maximum or minimum rate of an ARM, regardless of index.
  • The refusal of banks to lend to residents of certain neighborhoods is called redlining.

  • What are the four components of PITI?
    The four components of PITI are principal, interest, taxes, and insurance.
  • What constitutes a high-interest loan, as defined by HOEPA?
    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.
  • What is a foreclosure?
    A foreclosure is a court-ordered sale of property whose mortgage has not been paid.
  • What is the adjustment interval on an ARM?
    The adjustment interval is the length of time that a given rate and payment are in effect.
  • What is the Federal National Mortgage Association?
    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.
  • What is the loan-to-value relationship?
    The loan-to-value relationship is the value of the loan compared to the value of the asset.
  • Are interest rates for fixed rate mortgages usually higher or lower than for other types? Why?
    Interest rates are usually higher for fixed rate mortgages, because of the risk for the bank.
  • What are the requirements for lenders who wish to participate in the Fannie Mae program? How many lenders are approved by Fannie Mae?
    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. More than 2600 lenders are approved for Fannie Mae.
  • What forms do home equity loans usually take? How is a home equity loan different from a typical consumer loan?
    Home equity loans usually take 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.
  • Why are lenders interested in the appraised value of a property before deciding whether or not to grant a mortgage loan?
    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.