Chapter Exercises Flashcards by Delia Archer

Chapter 1:
Exercise 1.1:
Apply Your Knowledge:
Match the term with the statement that best describes it.

TERM:
A. FDIC
B. FHA
C. Fully Amortizing
D. Jumbo Loans
E. Mortgage Insurance

STATEMENT:
1. Covers loss due to default and property value decline
2. Insures bank deposits
3. Largest mortgage loan insurer
4. Level loan payments
5. Non-conforming loan

A. FDIC - 2. Insures bank deposits
B. FHA - 3. Largest mortgage loan insurer
C. Fully Amortizing - 4. Level loan payments
D. Jumbo Loans - 5. Non-conforming loan
E. Mortgage Insurance - 1. Covers loss due to default and property value decline

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Chapter 1:
Exercise 1.2:
Knowledge Check:
The ______ was created in 1933 as part of the NEW DEAL to insure consumer deposits.

A. Department of Housing and Urban Development (HUD)
B. Federal Deposit Insurance Corporation (FDIC)
C. Federal Housing Finance Agency (FHFA)
D. National Credit Union Administration (NCUA)

B. Federal Deposit Insurance Corporation. The FDIC was created in 1933 as part of the New Deal, to insure commercial bank deposits against bank failures and bank runs.

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Chapter 1:
Exercise 1.3:
Knowledge Check:
1. When borrowers and MLOs come together to negotiate terms and close mortgage loan transactions, this is referred to as:

A. hypothecation.
B. mortgage-brokered loans.
C. the primary mortgage market.
D. the secondary mortgage market.

C. the primary market. - When borrowers and lenders negotiate mortgage terms and close mortgage loans, they are acting in the primary market.

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Chapter 1:
Exercise 1.3:
Knowledge Check:
2. Mortgage bankers fund mortgage loans with all the following EXCEPT:

A. borrowed capital.
B. in-house cash.
C. hedge funds.
D. warehouse lines of credit.

C. hedge funds. - The mortgage banker, as a correspondent, closes the loan with internally-generated funds in its own name or with funds borrowed from a warehouse lender.

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Chapter 1:
Exercise 1.4:
Knowledge Check:
1. Conforming loans follow loan-to-value and income expense guidelines that are set by secondary market agencies such as:

A. the CFPB.
B. the FFIEC.
C. the FNMA.
D. PMI companies.

C. the FNMA. - FNMA (Fannie Mae) creates national underwriting criteria, which is the guideline for the loan characteristics that it will purchase in the secondary market.

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Chapter 1:
Exercise 1.4:
Knowledge Check:
2. _______ guarantees investors the timely payment of principal and interest on MBSs backed by federally-insured or guaranteed loans - mainly loans insured by the FHA or guaranteed by the VA.
A. Fannie Mae
B. Freddie Mac
C. Ginnie Mae

C. Ginnie Mae - Ginnie Mae guarantees investors the timely payment of principal and interest on MBSs backed by federally-insured or guaranteed loans
- mainly loans insured by the FHA or guaranteed by the VA.

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Chapter 1:
Exercise 1.4:
Knowledge Check:
3. By participating in the secondary mortgage market, mortgage lenders can:

A. close more conventional loans.
B. obtain government backing for their closed loans.
C. provide competitive interest rates.
D. replenish the funds used to make mortgage loans.

D. replenish the funds used to make mortgage loans. - When mortgage lenders sell their mortgage loans to secondary market participants, the source of money used to fund the sold loans is replenished and becomes available to make loans to new consumers.

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Chapter 1:
Exercise 1.5:
Knowledge Check:
1. Section ____ of Subtitle ___ of Title ___ under the Dodd-Frank Act established the:
A. Consumer Financial Protection Bureau.
B. Federal Deposit Insurance Corporation.
C. National Credit Union Administration.
D. Nationwide Multistate Licensing System & Registry.

A. Consumer Financial Protection Bureau - Section
1011 of Subtitle A of Title X under the Dodd-Frank Act created the Consumer Financial Protection Bureau, whose task is to enforce consumer financial protection laws.

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Chapter 1:
Exercise 1.5:
Knowledge Check:
2. The Mortgage Reform and Anti-Predatory Lending
Act established by Title ____ under the Dodd-Frank Act requires MLOs to apply qualifying minimum standards and defines a category of qualified loans to prevent
A. borrower fraud.
B. high-cost home loans.
C. mortgage fraud.
D. predatory lending practices.

D. Title A - predatory lending practices - The Mortgage Reform and Anti-Predatory Lending Act addresses abusive or predatory lending practices in the mortgage industry.
For example, Subtitle B of Title XIV requires MLOs to apply minimum qualifying standards and defines a new category of “QUALIFIED” loans.

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Chapter 1:
Chapter Quiz:
1. Which is NOT a function of the secondary market?

A. moderate effects of local real estate cycles
B. provide lenders with money to make more loans
C. serve as a depository for consumer assets
D. standardize loan criteria

C. serve as a depository for consumer assets -
Secondary markets are non-depository entities that purchase closed loans, which conform to the guidelines set by the secondary market. They are not depository institutions and cannot accept consumer deposits.

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Chapter 1:
Chapter Quiz:
2. The Consumer Financial Protection Bureau was created by the:

A. Dodd-Frank Act.
B. Federal Home Loan Bank Act.
C. Federal Reserve Act.
D. National Housing Act.

A. Dodd-Frank Act. - The Dodd-Frank Act established the CFPB.

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Chapter 1:
Chapter Quiz:
3. Mortgage brokers:

A. act as intermediaries between borrowers and lenders.
B. originate and service mortgage loans.
C. provide funding for mortgage loans.
D. underwrite mortgage loans.

A. act as intermediaries between borrowers and lenders. - A lender is a financial institution that makes loans directly to you. A broker does not lend money. A broker finds a lender. A broker may work with many lenders.

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Chapter 1:
Chapter Quiz:
4. Which entity was established in 1932 as a cooperative to finance housing in local communities?

A. Federal Home Loan Banks (FHL)
B. Federal Home Loan Mortgage Corporation (FHLMC)
C. Federal Housing Finance Agency (FHFA)
D. Government National Mortgage Association (GNMA)

A. Federal Home Loan Banks - Created by Congress, the Federal Home Loan Banks have been the largest source of funding for mortgage lending for eight decades and were established in 1932 as a cooperative to finance housing in local communities.

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Chapter 1:
Chapter Quiz:
5. Which is NOT a primary lender for residential properties?

A. commercial banks
B. insurance companies
C. mortgage companies
D. savings and loan associations

B. insurance companies - Insurance companies are NOT primary lenders of residential mortgages.

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Chapter 1:
Chapter Quiz:
6. Which statement about Ginnie Mae is TRUE?
A. Ginnie Mae buys loans from commercial banks and mortgage companies.
B. Ginnie Mae guarantees mortgage-backed securities.
C. Ginnie Mae is a participant in the primary market.
D. Ginnie Mae is a private corporation.

B. Ginnie Mae guarantees mortgage-backed securities. - Ginnie Mae guarantees investors the timely payment of principal and interest on MBSs are backed by FEDERALLY-insured or GUARANTEED loans - These are mainly loans insured by the FHA or guaranteed by the VA.

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Chapter 1:
Chapter Quiz:
7. The Consumer Financial Protection Act combined consumer protection responsibilities under the CFPB from the following agencies EXCEPT the:

A. Department of Commerce.
B. Department of Housing and Urban Development.
C. Federal Deposit Insurance Corporation.
D. Federal Trade Commission.

A. Department of Commerce. - The Consumer
Financial Protection Act consolidated consumer protection responsibilities previously handled by the Office of the Comptroller of the Currency, Office of Thrift Supervision, Federal Deposit Insurance Corporation, Federal Reserve, National Credit Union Administration, the Department of Housing and Urban Development, and Federal Trade Commission under the CFPB.

Chapter 1:
Chapter Quiz:
8. Which GSE holds the largest amount of home loan mortgages?

A. Federal Agricultural Mortgage Corporation
B. Federal Home Loan Mortgage Corporation
C. Federal National Mortgage Association
D. Government National Mortgage Association

C. Federal National Mortgage Association - The Federal National Mortgage Association (FNMA/ Fannie Mae) is the nation’s LARGEST investor in residential mortgages. Fannie Mae was originally chartered as a GSE by Congress in 1938 to provide liquidity and stability to the U.S. housing and mortgage markets, primarily as a place for lenders to sell their FHA-insured loans.

Chapter 2:
Exercise 2.1: Apply Your Knowledge:
Consider the following scenario, and then consider your response:

Scenario: Mary Smith has a stable monthly gross income of $3,200.
She has three long-term monthly debt obligations:
$220 car payment, $75 personal loan payment, and $50 revolving charge card payment.

Questions:
1. What ratios do you use to determine her maximum monthly mortgage?
2. What is the formula to calculate the Housing Expense Ratio? What is the formula to calculate the Total Debt To Income Ratio?
3. Calculate Both Ratios. Which calculation do you use? And why?
4. What’s the maximum monthly mortgage payment for which she can qualify?

Housing expense ratio: 28%
Total Debt To Income Ratio: 36%
Gross Monthly Income x Housing Expense Ratio (0.28)
Gross Monthly Income x Total Debt To Income Ratio (0.36)
3.
$3,200 Monthly Gross Income
× 0.28 Housing Expense Ratio
= $ 896 Maximum Mortgage PITI Payment

$3,200 Monthly Gross Income
× 0.36 Total Debt To Income Ratio
= $1,152 Maximum Debt
Then Subtract All Debt:
- $220 Car Payment
- $ 75 Personal Loan Pavment
- $ 50 Revolving Card Payment
= $ 807 Maximum Mortgage PITI Payment
• Choose the number with lesser value in dollar amount because that’s the one the lender always uses.
4. $ 807 Maximum Monthly Mortgage Payment

Chapter 2:
Exercise 2.1: Apply Your Knowledge:
Consider the following scenario, and then consider your response:

Scenario: Mary Smith has a stable monthly gross income of $3,200.
She has three long-term monthly debt obligations:
$220 car payment, $75 personal loan payment, and $50 revolving charge card payment.

Questions:
1. What’s the maximum monthly mortgage payment for which she can qualify?
2. What steps could Mary take to qualify for a larger mortgage payment?

The maximum monthly mortgage payment Mary can qualify for is $807. Remember, when both ratios are used, Mary must qualify under both ratios, so the lower figure is the most she can afford. The $807 number represents the maximum payment for principal, interest, taxes, and insurance (PITI) plus any other housing obligations, such as Homeowner’s Association dues.
If Mary could pay off some of her installment debts and reduce her total long-term monthly obligations, she could improve her debt-to-income ratio and would be able to qualify for a larger mortgage payment.

Chapter 2:
Exercise 2.2:
Apply Your Knowledge:
Consider the following scenario, and then consider your response:

Scenario: Two months ago, Lisa was honorably discharged from the Air Force where she spent four years training as an airplane mechanic. After discharge, she relocated to take a 40 hour per week apprentice mechanic job with a major airline company where she earns $18 an hour. Last month, her husband Dave, who has worked the past two years as a registered nurse, found a nursing job with a local hospital, making $625 per week. They just bought a new car, pay $400 each month on that loan, and have no other monthly debts.
1. What is the maximum mortgage payment (PITI) a lender would allow for a conventional loan based on the housing expense ratio only?

First Calculate Lisa’s monthly income =
$18 hourly wage x 40 hours/wk
x 52 wks = $37,440 annual income
> $37,440 annual income ÷ 12 months
= $3,120 Gross Income per Month

Next Calculate Dave’s monthly income = $625 weekly income x 52 weeks = $32,500 annual income
> $32,500 annual income ÷ 12 months
= $2,708.33 Gross Income per Month

Then Combine Total stable monthly income =
$3,120 +$2,708.33 = $5,828.33

Lastly Calculate the Maximum housing expense = $5,828.33 x 0.28 (Housing Expense Ratio)
= $1,631.93 Maximum Mortgage Payment (PITI)

Chapter 2:
Exercise 2.2:
Apply Your Knowledge:
Consider the following scenario, and then consider your response:

Using the total debt-to-income ratio, what is the maximum amount of total debt allowed for a conventional loan?

Maximum debt-to-income allowed =
$5,828.33 x 0.36 (DTI)=$2,098.20

Chapter 2:
Exercise 2.2:
Apply Your Knowledge:
Consider the following scenario, and then consider your response:

Scenario: Two months ago, Lisa was honorably discharged from the Air Force where she spent four years training as an airplane mechanic. After discharge, she relocated to take a 40 hour per week apprentice mechanic job with a major airline company where she earns $18 an hour. Last month, her husband Dave, who has worked the past two years as a registered nurse, found a nursing job with a local hospital, making $625 per week. They just bought a new car, pay $400 each month on that loan, and have no other monthly debts. Maximum debt-to-income has been previously established at $2,098.20.

What is the maximum mortgage payment (PITI) a lender would allow for a conventional loan using total debt-to-income ratio only?

Maximum housing expense
= $2,098.20 - $400 (car loan) = $1,698.20
REMEMBER: to use the lower monthly payment allowable, which is $1,631.93.

Chapter 2:
Exercise 2.2:
Apply Your Knowledge:
Consider the following scenario, and then consider your response:

Can Lisa and Dave get approved for a loan even though they’ve only been at their jobs a short time? Explain.

Yes. Although Lisa and Dave have only been at their jobs a short time, Lisa had special training in the Air Force and Dave is a vocational nurse, which also implies special training. Special education or training that prepares a person for a specific job (such as a nurse or medical doctor) can strengthen a loan application.

Chapter 2:
Exercise 2.3:
Apply Your Knowledge:
Consider the following scenario, and then consider your response:

Scenario: Sam Able wants to buy a home and it’s estimated that an 80% conventional loan will have a mortgage payment of $878. He has an automobile payment of $212
a month with 14 installments remaining. He earns $700 per week. His down payment and closing costs are estimated at $18,400. Sam is selling a home with equity of $14,000.
He has a checking and savings account with a local bank and plans to draw on that account to close the transaction.
The VOD showed Sam’s savings account has an average monthly balance of $1,000 and a current balance of $3,600.

What is Sam’s housing expense ratio?
a. Does Sam’s housing expense ratio qualify based on the housing expense ratio alone?

Calculate Sam’s Gross Annual Income:
$700 weekly income x 52 weeks = $36,400 annual income

Calculate Sam’s Monthly Income:
> $36,400 annual income
÷ 12 months
= $3,033.33 monthly income

Calculate Housing Expense Ratio: Divide Monthly Mortgage Payment By The Monthly Income To Get The Housing Expense Ratio:
$878 mortgage payment ÷ $3,033.33 monthly income
= 0.29 (29% housing expense ratio)

a. NO

Chapter 2: Exercise 2.3: Apply Your Knowledge: Consider the following scenario, and then consider your response: Scenario: Sam Able wants to buy a home and it's estimated that an 80% conventional loan will have a mortgage payment of $878. He has an automobile payment of $212 a month with 14 installments remaining. He earns $700 per week. His down payment and closing costs are estimated at $18,400. Sam is selling a home with equity of $14,000. He has a checking and savings account with a local bank and plans to draw on that account to close the transaction. The VOD showed Sam's savings account has an average monthly balance of $1,000 and a current balance of $3,600. Total monthly income has been previously established at $3,033.33. 2. What is Sam's total service debt? What is Sam's total debt-to-income ratio? a. Does Sam’s housing expense ratio qualify based on the housing expense ratio alone?

2. Calculate Sam’s Total Service Debt: $878 mortgage payment + $212 auto payment = $1,090 total debt service Divide Total Debt Service By Total Monthly Income: $1,090 total debt service ÷ $3,033.33 monthly income = 0.36 (36% total debt-to-income ratio) a. YES

Chapter 2: Exercise 2.3: Apply Your Knowledge: Consider the following scenario, and then consider your response: Scenario: Sam Able wants to buy a home and it's estimated that an 80% conventional loan will have a mortgage payment of $878. He has an automobile payment of $212 a month with 14 installments remaining. He earns $700 per week. His down payment and closing costs are estimated at $18,400. Sam is selling a home with equity of $14,000. He has a checking and savings account with a local bank and plans to draw on that account to close the transaction. The VOD showed Sam's savings account has an average monthly balance of $1,000 and a current balance of $3,600. • Total monthly income has been previously established at $3,033.33. • Total debt-to-income ratio has been previously established at 36%. • Housing expense ratio has been previously established at 29%. 3. Will Sam have any problems closing this transaction? Explain.

3. Yes, Sam will have a few problems closing this transaction. The EQUITY in his home ($14,000) plus CASH in the bank ($3,600) equals only $17,600, but his down payment plus estimated closing costs = $18,400. He needs to show TWO additional months of cash reserves. His housing expense ratio of 29% EXCEEDS guidelines.

Chapter 2: Exercise 2.3: Apply Your Knowledge: Consider the following scenario, and then consider your response: Scenario: Sam Able wants to buy a home and it's estimated that an 80% conventional loan will have a mortgage payment of $878. He has an automobile payment of $212 a month with 14 installments remaining. He earns $700 per week. His down payment and closing costs are estimated at $18,400. Sam is selling a home with equity of $14,000. He has a checking and savings account with a local bank and plans to draw on that account to close the transaction. The VOD showed Sam's savings account has an average monthly balance of $1,000 and a current balance of $3,600. • Total monthly income has been previously established at $3,033.33. • Total debt-to-income ratio has been previously established at 36%. • Housing expense ratio has been previously established at 29%. 4. Do you see any problems with Sam's VOD? Explain.

4. Yes, Sam’s VOD is a problem because his current balance of $3,600 is significantly higher than his average balance of $1,000. He will need to have a good explanation of where the funds came from so the lender knows that he did not borrow the down payment.

Chapter 2: Exercise 2.4: Apply Your Knowledge: 1. Which statement reflects the purpose of the ATR/QM rule? Select ALL correct responses: A. provides that lender with criteria for subprime lending B. allow a borrower to sue the lender in federal District Court to cancel the loan. C. allow a presumption that the lender followed the ATR guidelines if certain requirements are made. D. protects borrowers from a loan they may not be able to afford.

1. C. allow a presumption that the lender followed the AT guidelines if certain requirements are made. D. protects borrowers from a loan they may not be able to afford. The ATR/OM rule protects borrowers from entering into a loan he cannot afford. It also gives the lender the presumption that it followed the guidelines if certain requirements of the rule are met.

Chapter 2: Exercise 2.4: Apply Your Knowledge: 2. Which of the following are toxic features that are prohibited by the ATR/QM rule? Select ALL correct responses: A. interest-only payments B. maximum term of 30 years C. negative amortization D. term that exceeds 30 years

2. A. interest-only payments C. negative amortization D. term that exceeds 30 years As set forth by the ATR/QM rule, a qualified mortgage cannot include risky features such as interest-only payments, negative amortization, and a term that exceeds 30 years.

Chapter 2: Chapter Quiz: 1. Joe buys a house for $150,000, making a $30,000 down payment and paying three discount points to buy down the interest rate. What is the total cost of the discount points? A. $1,500 B. S3,000 C. $3,600 D. $4,500

C. A point is 1% of the loan amount. Since Joe made a $30,000 down payment, the loan amount is $120,000. One point on this loan equals $1,200 ($120,000 x 0.01), so three points is $3,600.

Chapter 2: Chapter Quiz: 2. • Mary receives a monthly child support payment from her ex-husband pursuant to a Judgment of Divorce. • Bob receives a monthly check because of a service-connected injury from his days in the military. • John is a minister and receives money every month for living expenses. These payments are examples of: A. gross-up income. B. nontaxable income. C. public assistance payments. D. unemployment compensation.

B. A regular source of a borrower's income may be nontaxable-such as child support payments, Social Security benefits, a minister's housing allowance, disability retirement payments, workers' compensation benefits, certain types of public assistance payments, and food stamps.

Chapter 2: Chapter Quiz: 3. If a borrower is self-employed, they should provide: A. an average monthly income amount earned over the previous two years. B. employment verification from the last employer. C. profit and loss statements for the previous six years. D. tax returns for the previous two years.

D. For self-employment income to be used for qualifying, self-employed borrowers need to provide personal and entity (corporation, partnership, sole proprietorship) tax returns (all schedules) for a minimum of two years.

Chapter 2: Chapter Quiz: 4. Bob and Mary are providing a gift to their daughter, Amy, as down payment for the purchase of her new home. They provide a current bank statement for their account, a copy of their check to Amy, and a copy of the deposit slip into Amy's account. Amy provides a current ledger from her checking account that verifies the deposit was made and the amount of the current balance. What key document is missing? A. agreement signed by all parties stating when the gift is to be repaid B. copy of the deposit receipt from the settlement agent C. gift letter signed by the donor stating no repayment is expected D. letter from Amy's bank stating the gift funds have been deposited

C. If an applicant lacks the necessary funds to close a transaction, a gift of the required amount may be acceptable. The gift should be confirmed by means of a gift letter signed by the donor. The letter should clearly state that the money represents a gift and does not have to be repaid. In addition to the gift letter, lenders want to verify that the donor has the funds available to provide the gift by seeing a copy of the gift check, a recent bank statement from the donors showing they have the ability to give the gift and a copy of the deposit receipt showing funds have been deposited and are available for closing.

Chapter 2: Chapter Quiz: 5. To be classified as self-employment income, the borrower must own at least what percent of the business used for qualifying? A. 5% B. 10% C. 25% D. 50%

C. To be classified as self-employment income, the borrower must own at least 25% of the business.

Chapter 2: Chapter Quiz: 6. The majority of lenders throughout the country have incorporated into their conventional loan underwriting procedures the standards set by the major secondary market investors, specifically: A. ECOA. B. Fannie Mae and Freddie Mac. C. FHA. D. RESPA.

B. Loans that are not backed by the full faith and credit of the United States follow the underwriting guidelines of Fannie Mae and Freddie Mac.

Chapter 2: Chapter Quiz: 7. When qualifying for a conventional loan, stable gross monthly income can include: A. alimony received (that a borrower chooses to reveal). B. a bonus received for the first time last year. C. erratic unemployment earnings. D. income from other family members.

A. Alimony received can be considered part of the borrower's stable monthly qualifying income if it's determined it is likely to be made on a consistent basis. Alimony should be expected to continue for a minimum of three years in order to be used in income calculations. It does not need to be listed as a source of income if a borrower does not want it considered.

Chapter 2: Chapter Quiz: 8. To combat income-related mortgage fraud, lenders require a review of the income provided to the IRS. What document authorizes the lender to obtain income transcripts from the IRS? A. 1003 and Verification of Income B. 4506-T C. Schedule 15 D. URAR

B. Underwriters generally require the lender to obtain a completed and signed Form 4506-T from a borrowers) at application. This form gives the lender permission to request electronic transcripts of federal tax returns from the IRS when documenting the borrower's income to prevent mortgage fraud.

Chapter 2: Chapter Quiz: 9. Joe wants to get a loan to buy a house. When evaluating his credit obligations, which would LEAST LIKELY be considered as debt? A. car loan payment B. cell phone service payment C. child support payment D. credit card payment

B. Utilities and insurance premiums are NOT considered debts because they can, in theory, be cancelled. Lenders assume borrowers would turn off their cell phones or cable service or make a late payment before losing their houses.

Chapter 2: Chapter Quiz: 10. Potential borrowers have stable monthly income of $3,000. They have three monthly debts: $350 car payment, $50 personal loan payment, and $50 credit card payment. What is the maximum monthly mortgage payment they would qualify for on a conforming loan? A. $390 B. $630 C. $840 D. $1,080

B. First Calculate The Front-End Ratio: The housing expense (front-end) ratio for a conventional conforming loan in 28%. $3,000 (monthly income) x 0.28 = $840 Housing Expense Ratio Next Calculate The Back-End Ratio: The total debt-to-income (back-end) ratio is 36%. $3,000 (monthly income) x 0.36 = $1,080 Total Debt To Income Ratio Then subtract the borrower's monthly debts from the debt to income ratio: $1,080 - ($350 +$50+ $50) = $630 REMEMBER: The lender will consider the lower number. The lender usually uses the Total Debt To Income Ratio ONLY.