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Multiple Choice Questions

[QUESTION]
1. 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:
A. primary mortgage market
B. secondary mortgage market
C. over-the-counter market
D. loan origination market
Ans: B
Difficulty: Basic
Learning Objective: 1
[QUESTION]
2. Which of the following types of institutions has historically been the largest purchaser of
residential mortgages?
A. Commercial banks
B. Savings and Loans
C. Government sponsored enterprises
D. Mortgage banking companies
Ans: C
Difficulty: Basic
Learning Objective: 1
[QUESTION]
3. 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?
A. Conventional home loan
B. Federal Housing Administration loan
C. Veterans Affairs loan
D. Section 203 loan
Ans: A
Difficulty: Basic
Learning Objective: 2
[QUESTION]
4. 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:
A. government sponsored loans
B. conforming conventional loans
C. nonconforming conventional loans

D. FHA loans
Ans: B
Difficulty: Basic
Learning Objective: 2
[QUESTION]
5. 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.
A. higher
B. equal
C. lower
D. more volatile
Ans: C
Difficulty: Intermediate
Learning Objective: 2
[QUESTION]
6. 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:
A. (fixed-rate) level payment mortgage (LPM)
B. adjustable rate mortgage (ARM)
C. subprime mortgage
D. alt-A mortgage
Ans: A
Difficulty: Basic
Learning Objective: 2
[QUESTION]
7. 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?
A. Losses due to default on the loan
B. Legal threat to the lenders mortgage claim
C. Stoppage of mortgage payment after the death of the insured borrower
D. Changes in the index rate associated with an adjustable rate mortgage
Ans: A
Difficulty: Basic
Learning Objective: 3
[QUESTION]
8. Mortgage insurance rates vary with the perceived riskiness of the loan. Which of the
following scenarios would result in a higher mortgage insurance premium?

A. Lower loan-to-value ratio


B. Shorter loan term
C. Stronger credit record of the borrower
D. A cash-out refinancing loan
Ans: D
Difficulty: Intermediate
Learning Objective: 3
[QUESTION]
9. The Federal Housing Administration (FHA) insures loans made by private lenders that
meet FHAs property and credit-risk standards. Which of the following statements concerning
FHA insurance is true?
A. The insurance is paid by the lender and protects the lender against loss due to borrower
default.
B. The insurance is paid by the borrower and protects the lender against loss due to borrower
default.
C. The insurance is paid by the lender and protects the borrower against loss due to lender
default.
D. The insurance is paid by the borrower and protects the borrower against loss due to lender
default.
Ans: B
Difficulty: Intermediate
Learning Objective: 3
[QUESTION]
10. 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:
A. FHA loans are targeted toward first-time homebuyers who are in slightly weaker financial
circumstances than the typical prime conventional borrower.
B. FHA loans are more tolerant in terms of qualifying debt-to-income ratios
C. FHA loans require higher credit scores than are needed for prime conventional loans.
D. FHA loans contain lower limits on their maximum size than are available through
conforming conventional loans.
Ans: C
Difficulty: Intermediate
Learning Objective: 3
[QUESTION]
11. 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?
A. Level-payment, fully amortizing loan
B. Adjustable rate mortgage

C. Partially-amortizing balloon loan


D. Subprime mortgage loan
Ans: A
Difficulty: Basic
Learning Objective: 3
[QUESTION]
12. 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?
A. Purchase-money mortgage (PMM)
B. Piggyback Mortgage
C. Home equity loan
D. Reverse mortgage
Ans: D
Difficulty: Basic
Learning Objective: 4
[QUESTION]
13. 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:
A. Lower interest rates than other consumer debt
B. Shorter terms than other consumer debt
C. Tax-favored status
D. Aggressive marketing by lenders
Ans: B
Difficulty: Intermediate
Learning Objective: 4
[QUESTION]
14. 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:
A. 1-5 years
B. 5-7 years
C. 7-15 years
D. 15-30 years
Ans: B
Difficulty: Basic
Learning Objective: 4
[QUESTION]
15. The hybrid ARM attempts to balance the fixed payment desire of a borrower with the
lenders 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:
A. 1 year
B. 2 years
C. 26 years
D. 28 years
Ans: B
Difficulty: Basic
Learning Objective: 4
[QUESTION]
16. 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:
A. subprime loans
B. option ARM loans
C. hybrid ARM loans
D. alt-A loans
Ans: D
Difficulty: Basic
Learning Objective: 4
[QUESTION]
17. 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?
A. Upfront fees
B. Contracted interest rate
C. Annual percentage rate
D. Teaser rate
Ans: C
Difficulty: Basic
Learning Objective: 5
[QUESTION]
18. 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:
A. interest rates will always rise
B. the loan always goes to maturity
C. the actual life of the loan is shorter than maturity
D. upfront fees should be ignored
Ans: B
Difficulty: Intermediate
Learning Objective: 5

[QUESTION]
19. 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?
A. Payback period approach
B. Net benefit approach
C. Interest rate spread
D. Net present value approach
Ans: C
Difficulty: Intermediate
Learning Objective: 5
[QUESTION]
20. 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?
A. Death in the family
B. Divorce
C. Unemployment
D. Mortgage payment spikes
Ans: D
Difficulty: Intermediate
Learning Objective: 6
[QUESTION]
21. Suppose a buyer agrees to purchase a tract of land for $40,000. The buyer is only able to
obtain a mortgage for $32,000. Rather than let the deal fall through, the seller agrees to accept
$4,000 in cash and a note from the buyer for the remaining $4,000. This type of transaction is
commonly referred to as a:
A. conventional loan
B. home equity mortgage
C. purchase money mortgage
D. reverse mortgage
Ans: C
Difficulty: Advanced
Learning Objective 4
[QUESTION]
22. Suppose a homeowner is reluctant to refinance until he is reasonably sure that interest
rates are not going to fall appreciably from where they currently are. In this case, the

homeowner appears to be concerned about which of the following costs associated with
refinancing?
A. Opportunity cost
B. Tax consequences
C. Default risk
D. Upfront fees
Ans: A
Difficulty: Advanced
Learning Objective: 5
[QUESTION]
23. In recent years, mortgage lenders responded to the demand from home buyers who were
unable to put 20 percent down on their purchase and were looking to avoid the private
mortgage insurance (PMI) requirement that would typically accompany such a loan by
developing a second mortgage that is created simultaneously with the first mortgage in an
amount of ten percent of the value of the home. This enabled the borrower to obtain 90
percent financing while avoiding the additional cost of PMI. These loans are more commonly
referred to as:
A. Reverse mortgages
B. Home equity loans
C. Piggyback mortgage loans
D. Subprime mortgage loans
Ans: C
Difficulty: Basic
Learning Objective: 4
[QUESTION]
24. When a borrower decides to stop making payments on an existing mortgage loan
despite having the ability to make payments (typically when the home has lost value), this
is more commonly referred to as a(n):
A. Equity redemption
B. Statutory redemption
C. Strategic default
D. Reverse mortgage
Ans: C
Difficulty: Basic
Learning Objective: 6
[QUESTION]
25. A conventional mortgage loan is one that is not insured or guaranteed by an agency of the
U.S. government. The lender, however, can still pursue a private mortgage insurance (PMI)
policy to provide a guarantee for the fulfillment of the borrowers obligations. Typically PMI
is required for all loans that have a loan to value (LTV) ratio greater than:
A. 20%

B. 40%
C. 60%
D. 80%
Ans: D
Difficulty: Basic
Learning Objective: 3
[QUESTION]
26. FHA mortgage insurance covers any lender loss after conveyance of title of the property
to the U.S. Department of Housing and Urban Development (HUD). FHA mortgage insurance
requires two premiums to be paid: the UFMIP (up-mortgage insurance premium) and the MIP
(monthly insurance premium). Currently, the UFMIP is what percentage of the loan for
normal loans used to purchase a personal residence?
A. 1.0%
B. 1.5%
C. 2.0%
D. 4.0%
Ans: A
Difficulty: Intermediate
Learning Objective: 3
[QUESTION]
27. In addition to the UFMIP (up-front mortgage insurance premium), the owner-occupant
borrower who decides to use an FHA mortgage loan will normally pay an additional annual
mortgage insurance premium (MIP) that depends on the loan-to-value ratio and the term of
the loan. For loans with maturity longer than 15 years and a loan to value ratio that is greater
than 95 percent, the MIP will be what percentage of the average annual loan balance?
A. 0.25%
B. 0.50%
C. 1.10%
D. 1.15%
Ans: D
Difficulty: Intermediate
Learning Objective: 3
Multiple Choice Problems
[QUESTION]
28. Assume that a veteran decides to purchase a house for $150,000 using a VA loan that
amounts to $44,000. If the buyer were to defaults on the loan, what is the maximum amount
that the VA guarantees the lender?
A. $11,000
B. $22,000

C. $33,000
D. $44,000
Ans: B
Difficulty: Intermediate
Learning Objective: 3
[QUESTION]
29. Considering the following information, what is the NPV if the borrower refinances the
loan? Expected holding period: 15 years, Current loan balance: $100,000; Current loan
interest: 7%; Current loan mortgage payment: $898.33; Remaining term on current mortgage:
15 years; New loan interest: 5.5%; New loan mortgage payment: $817.08; New loan term: 15
years; Cost of refinancing: $$5000. Assume that the opportunity cost is the interest rate on the
new loan (5.5%).
A. -$5,000.00
B. -$56.52
C. $4,943.48
D. $9,943.48
Ans: C
Difficulty: Advanced
Learning Objective: 5
[QUESTION]
30. Considering the following information, what is the NPV if the borrower refinances the
loan? Expected holding period: 3 years, Current loan balance: $100,000; Current loan interest:
7%; Current loan mortgage payment: $898.33; Remaining term on current mortgage: 15
years; New loan interest: 5.5%; New loan mortgage payment: $817.08; New loan term: 15
years; Cost of refinancing: $5,000. Assume that the opportunity cost is the interest rate on the
new loan (5.5%).
A. -$5,000.00
B. -$1,155.27
C. $3,844.73
D. $8,844.73
Ans: B
Difficulty: Advanced
Learning Objective: 5
[QUESTION]
31. Suppose that you are in the process of deciding whether or not to refinance your fixed rate
mortgage at a lower rate and you are interested in using the payback period rule of thumb to
help you in your decision. Your lender has informed you that the cost of refinancing would be
$4,300. If your original monthly mortgage payment was $1,250 and your new monthly
mortgage payment would be $1,150 after refinancing, determine the payback period.
A. 3 months

B. 4 months
C. 43 months
D. 158 months
Ans: C
Difficulty: Intermediate
Learning Objective: 5
[QUESTION]
32. Suppose you have just purchased your first home for $300,000. At the time of purchase
you could afford to commit 20% of the purchase price to a down-payment. Suppose over time
you paid down the principal of the loan to $220,000 and at that point in time you can no
longer make any mortgage payments (i.e., you default on the loan). If the lender were to
foreclose on your property and sell it for $190,000, determine the amount of the loans
principal that the lender was unable to recover due to the default.
A. $30,000
B. $50,000
C. $240,000
D. $300,000
Ans: A
Difficulty: Basic
Learning Objective: 3
[QUESTION]
33. Suppose you have just purchased your first home for $300,000. At the time of purchase
you could only afford to commit to a down-payment of $15,000. In order to make the loan,
the lender requires you to obtain private mortgage insurance (PMI) on their behalf. Suppose
over time you paid down the principal of the loan to $280,000 and at that point in time you
can no longer make any mortgage payments (i.e., you default on the loan). If the lender were
to foreclose on your property and sell it for $228,000, what would the lenders loss of
principal be taking into consideration the protection of mortgage insurance? (Lets assume
that the PMI in this case covers the top 30% of the loan)
A. $0
B. $52,000
C. $57,000
D. $72,000
Ans: A
Difficulty: Intermediate
Learning Objective: 3
[QUESTION]
34. Suppose you are interested in taking a mortgage loan for $250,000 in order to purchase
your principal residence. Your lender has suggested that you might be interested in taking an
FHA loan. In order to do so, you must pay an additional up-front mortgage insurance

premium (UFMIP) of 1.0% of the mortgage balance. If the interest rate on the fullyamortizing mortgage loan is 5% and the term is 30 years, what is your monthly mortgage
payment assuming the UFMIP is financed?
A. $1,342.05
B. $1,355.47
C. $1,498.88
D. $2,500
Ans: B
Difficulty: Intermediate
Learning Objective: 3
[QUESTION]
35. Suppose you are interested in taking an FHA mortgage loan for $350,000 in order to
purchase your principal residence. In order to do so, you must pay an additional up-front
mortgage insurance premium (UFMIP) of 1.0% of the mortgage balance. If the interest rate
on the fully-amortizing mortgage loan is 6% and the term is 30 years and the UFMIP is
financed (i.e., it is included in the loan amount), what is the dollar portion of your monthly
mortgage payment that is designated to cover the UFMIP?
A. $20.98
B. $291.67
C. $2,119.41
D. $3,500.00
Ans: A
Difficulty: Advanced
Learning Objective: 3
[QUESTION]
36. Suppose you have obtained a 6%, 30 year fully-amortizing FHA mortgage loan of
$152,625 to finance the purchase of your primary residence. In so doing, you must pay an
additional mortgage insurance premium (MIP) of 1.10%. If the first-year average loan balance
is $151,775.25, determine the first-year monthly insurance premium payment.
A. $139.13
B. $1,025.69
C. $1,669.53
D. $1,678.88
Ans: A
Difficulty: Intermediate
Learning Objective: 3
[QUESTION]
37. In a fixed-term, level-payment reverse mortgage, sometimes called a reverse annuity
mortgage, or RAM, a lender agrees to pay the homeowner a monthly payment, or annuity, and
expects to be repaid from the homeowners equity when he or she sells the home or obtains
other financing to pay off the RAM. Consider a household that owns a $150,000 home free

and clear of mortgage debt. The RAM lender agrees to a $100,000 RAM for 10 years at 6
percent. Assume payments are made annually, at the beginning of each year to the
homeowner. Calculate the annual payment on the RAM.
A. $7,157.35
B. $7,586.80
C. $12,817.73
D. $13,586.80
Ans: A
Difficulty: Intermediate
Learning Objective: 4