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1) Consider
two possible loan modifications for an “underwater”first mortgage, principal
reduction and interest rate reduction.
The house is now worth $60,000.
The remaining principal is $75,765, the interest rate is 5%, the monthly
payment is $500, and the remaining term of the mortgage is 20 years. Reducing the interest rate to zero results in
a monthly payment of $315.69.
Alternatively, reducing the principal to $47,836.51 also results in a
monthly payment of $315.69.
A) The
interest rate reduction will be better for the bank
B) The
principal reduction will be better for the bank
C) The bank
should be indifferent between the two
2) When
making first mortgage loan decisions, lenders should place greater emphasis on
_________ and less emphasis on ________ in non-recourse states than in recourse
states.
A) LTV,
borrower’s income
B) Borrower’s
income, LTV
3) Suppose
the homeowner is 90 days delinquent. All
else equal, a first mortgage lender is more likely to allow a short sale to
occur in a _____ state than in a ______ state.
A) Judicial,
non-judicial
B) Non-judicial,
judicial
4) Suppose
that there is only one mortgage on a property in a non-recourse state with a
balance of $180,000. There is no
mortgage insurance on the loan and no right of redemption in the state. The loan is delinquent and the foreclosure
sale is tomorrow. The bank has obtained
an appraisal and believes the house could be sold for $150,000 in 3 months. Realtor commissions would be $8,000 and
upkeep costs, insurance, and property taxes for 3 months would total $2,000.
The bank should open the bidding at a price of
A) $180,000
B) $170,000
C) $160,000
D) $150,000
E) $140,000
5) Suppose
that there are two mortgages on a property.
The first mortgage bank is owed $200,000 and the second mortgage bank is
owed $50,000. The first mortgage is
delinquent and the foreclosure sale is tomorrow. The first mortgage bank has obtained an
appraisal and believes the house could be sold for $225,000 in 3 months. Realtor commissions would be $10,000 and
upkeep costs, insurance, and property taxes for 3 months would total
$2,000. The first mortgage bank should
open the bidding at a price of
A) $188,000
B) $225,000
C) $200,000
D) $213,000
6) Banksmust
delay legal foreclosure action until a residential first mortgage loan is
delinquent by more than ____ days.
A) 30
B) 45
C) 120
D) 180
?
7) A
$150,000, 30-year interest-only mortgage, with a 5-year interest-only period,
has an 8% interest rate, compounded monthly.
During the 3rd year of the mortgage, assuming no prepayments, the
required monthly payment is $_______.
A) 1,075
B) 1,000
C) 968
D) 1,333
E) 1,139
8) A
$150,000, 30-year interest-only mortgage, with a 5-year interest-only period,
has an 8% interest rate, compounded monthly.
During the 10th year of the mortgage, assuming no prepayments, the
required monthly payment is $_______.
A) 1,468
B) 1,390
C) 1,255
D) 1,158
E) 1,027
9) With a
________ transaction, the lender receives the property in exchange for
cancelling the mortgage debt.
A) Deed in
lieu
B) Redemption
C) Recourse
10) The down
payment is $200,000 on a house with an agreed-upon price (and appraisal) of
$900,000. Jumbo mortgage rates are 5.5%
and conforming rates are 5%. If the
conforming loan limit is $417,000 in the area, then the breakeven rate on a
second mortgage arrangement as discussed in class is ________.
A) 6.49%
B) 7.38%
C) 7.15%
D) 6.91%
E) 6.24%
11) In today’s
interest rate environment, 30-year 5/1 ARMs are better than 30-year fixed-rate
mortgages for homebuyers expecting to stay in the house for a relatively _____
time.
A) Long
B) Short
12) The
initial rate on a 5/1 ARM is 4%. The
loan has a margin of 2.5% and a 5% lifetime cap. At origination, the index is 2%. The maximum interest rate that can be charged
over the life of the loan is
A) 7%
B) 7.5%
C) 9%
D) 8.5%
E) 5%
13) The
initial rate on a 3/1 ARM is 4%. The
loan has a margin of 2.5%, a 2% per year cap, and a 6% lifetime cap. At origination, the index is 2%. If the index is 4% at the end of year three,
then the rate in year four will be
A) 6.5%
B) 6%
C) 4%
D) 4.5%
14) Comparing
a 4% 15-year mortgage with no points and a 3.875% 15-year mortgage with one
point, if the buyer expects to remain in the house for 6-7 years, then
A) The no
points mortgage is clearly better
B) The one
point mortgage is clearly better
C) It is a
close call, requiring present value calculations
15) Borrowers
should simply choose the lowest APR from various 30-year fixed-rate mortgage
offers if they
A) Expect to
remain in the house for 30 years before selling
B) Expect to
remain in the house for 3 years before selling
16) For the
5/1 no-points ARM now offered by PenFed, the APR on the loan is probably
_______ than the true expected annual cost of the loan over the next 30 years.
A) Higher
B) Lower
17) The issue
of resubordination of a second mortgage could arise in a _______ transaction.
A) Refinancing
B) Deed in
lieu
C) Short
sale
D) Both B and
C
18) Which of
the following is correct about qualified mortgages (QM)?
A) If a
mortgage is not a QM, then the borrower does not have a reasonable ability to
repay
B) If a
mortgage is a QM, then the borrower has a reasonable ability to repay
C) Both
statements are correct
19) Suppose a
borrower is offered a 3/1 ARM at 3% with a 2% per year cap and a 6% lifetime
cap. The 1-year T-bill index is now 0.5%
and the margin is 2.5%. Then to be a
“qualified mortgage”under the Dodd-Frank law, the lender must calculate the
borrower’s debt-to-income ratiousing an interest rate of_______ on the loan.
A) 3%
B) 9%
C) 5%
D) 5.5%
E) 7%
20) In New
York City, ______.
A) Balloon
mortgages cannot be qualified mortgages
B) Interest-only
mortgages cannot be qualified mortgages
C) Both
balloon and interest-only mortgages can be qualified mortgages
D) Neither
balloon nor interest-only mortgages can be qualified mortgages
21) Which
expense is tax deductible (within limits) for individuals?
A) Mortgage
interest
B) Mortgage
discount points
C) Both A
and B
D) Neither A
nor B
22) Under the
Dodd-Frank law, prepayment penalties on residential first mortgages
A) Are
allowed in certain circumstances for qualified mortgages
B) Are
allowed in certain circumstances for non-qualified mortgages
C) Are
banned for all mortgages
D) Are
permitted for all mortgages
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