Real Estate Principles A Value Approach 5th Edition Ling Test Bank

Real Estate Principles A Value
Approach 5th Edition Ling Test Bank

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Real Estate Principles: A Value Approach, 5e (Ling)
Chapter 9 Real Estate Finance: The Laws and Contracts
1) In a mortgage loan, the borrower always creates two documents: a note and a mortgage. Which
of the following pieces of information is provided in the mortgage?
A) how the interest rate is to be computed
B) whether the borrower has the right to prepay the principal during the term of the loan, and any
prepayment penalties that would be incurred as a result
C) whether the borrower is released from liability for fulfillment of the contract
D) an unambiguous description of the property that is being pledged as collateral for the loan
Answer: D
Difficulty: 1 Easy
Learning Objective: 09-02 With respect to a note, state the meaning of personal liability,
exculpatory clause, demand clause, and default.
Accessibility: Keyboard Navigation
2) A significant number of mortgage loans use adjustable interest rates, in which the interest rate of
the loan is tied to an index rate that fluctuates over time. For income-producing property, the most
common index rate is the
A) one-year U.S. Treasury constant maturity rate.
B) prime rate.
C) London Interbank Offered Rate (LIBOR).
D) cost-of-funds index.
Answer: C
Difficulty: 2 Medium
Learning Objective: 09-01 Correctly use these terms concerning an adjustable interest rate:
index, margin, periodic cap, overall cap, payment cap, adjustment period, and teaser rate.
3) Added to the index of the adjustable rate is a margin, which is the lender's markup. For standard
adjustable rate mortgage (ARM) loans, the average industry margin has been stable at
approximately
A) 75 basis points.
B) 175 basis points.
C) 275 basis points.
D) 375 basis points.
Answer: C
Difficulty: 1 Easy
4) Most adjustable rate mortgage (ARM) loans have been marketed with a temporarily reduced
interest rate commonly referred to as a
A) rate cap.
B) teaser rate.
C) payment cap.
D) prepayment rate.
Answer: B
Difficulty: 1 Easy
5) For most mortgage loans on commercial real estate, the right of prepayment is constrained
through a prepayment penalty. Which of the following types of prepayment penalties requires a
borrower to provide the lender with some combination of U.S. Treasury securities that will serve to
replace the cash flows of the loan being paid off?
A) yield-maintenance prepayment penalties
B) prepayment lockout
C) defeasance prepayment penalty
D) curtailment penalty
Answer: C
Difficulty: 1 Easy
6) Because the mortgage conveys a complex claim for a long period of time, clauses are included
in anticipation of possible future complications. Which of the following clauses requires a
borrower to make monthly deposits into an account in order to pay obligations such as property
taxes, community association fees, or causality insurance premiums?
A) demand clause
B) insurance clause
C) escrow clause
D) exculpatory clause
Answer: C
Difficulty: 1 Easy
Learning Objective: 09-03 State the effect of these clauses in a mortgage: insurance clause,
escrow clause, acceleration clause, and due-on-sale clause.
7) Certain mortgage loans contain a due-on-sale clause, which gives the lender the right to
terminate the loan at sale of the property. Which of the following types of loans is the most likely
to contain a due-on-sale clause?
A) Federal Housing Administration (FHA) loan
B) Veterans Affairs (VA) loan
C) conventional home loan
D) an assumable home loan
Answer: C
Learning Objective: 09-03 State the effect of these clauses in a mortgage: insurance clause,
escrow clause, acceleration clause, and due-on-sale clause.
8) Standard mortgage loans require monthly payments typically composed of two components:
interest and principal repayments. When scheduled mortgage payments are insufficient to pay all
of the accumulating interest, causing some interest to be added to the outstanding balance after
each payment shortfall, the loan is said to be
A) fully amortizing.
B) partially amortizing.
C) nonamortizing.
D) negatively amortizing.
Answer: D
Difficulty: 1 Easy
9) With most standard home loans, the lender can hold the borrower personally liable in the event
of a default. Such loans are commonly referred to as
A) recourse loans.
B) nonrecourse loans.
C) conforming loans.
D) nonconforming loans.
Answer: A
Difficulty: 1 Easy
10) In a mortgage agreement, the borrower conveys to the lender a security interest in the mortgage
property. The lender, i.e., the individual who receives the mortgage claim, is known as the
A) broker.
B) mortgagor.
C) agent.
D) mortgagee.
Answer: D
Difficulty: 1 Easy
Learning Objective: 09-04 Contrast a mortgage, a deed of trust, and a contract for deed.
11) Violations of the requirements of a note that do not disrupt the payments on the loan tend to be
viewed as technical defaults. In practice, how many days must a payment be overdue in order for
lenders to treat a default as serious (i.e., a substantive default)?
A) 1 day
B) 30 days
C) 60 days
D) 90 days
Answer: D
Difficulty: 1 Easy
Learning Objective: 09-05 List four alternative actions to foreclosure that a lender can take as a
remedy for default.
12) When a borrower defaults on the payment requirements of a loan, there are several options that
the lender has at its disposal. When the lender allows the borrower simply to convey the property
to the lender rather than pursue a court-supervised process of terminating all of the borrower's
claims of ownership of the property, this is commonly referred to as
A) bankruptcy.
B) foreclosure.
C) deed in lieu of foreclosure.
D) equity right of redemption.
Answer: C
Difficulty: 1 Easy
remedy for default.
13) Foreclosure is considered the ultimate recourse of the lender because it allows the lender to
bring about sale of the property to recover the outstanding indebtedness. All of the following
statements regarding foreclosure are true except
A) foreclosure is a costly process for all parties involved.
B) only those claimants who are properly notified and engaged in the foreclosure suit can lose their
claims to the property.
C) when a lender forecloses on a property, it extinguishes all superior liens, bringing about a free
and clear sale of the property.
D) the net recovery by a lender from a foreclosed loan seldom exceeds 80% of the outstanding loan
balance and commonly is much less than this amount.
Answer: C
Learning Objective: 09-06 State the function of a foreclosure, and the role of the following:
equity of redemption, statutory redemption, deficiency judgment, and judicial versus
power-of-sale foreclosure.
14) The difference between judicial foreclosure and power of sale in the treatment of defaulted
mortgages can be significant. All of the following statements regarding power of sale are true
except
A) the power of sale treatment is faster than judicial foreclosure.
B) the foreclosed property is typically sold through a public auction administered by the court.
C) it is less costly for power of sale to be employed than judicial foreclosure.
D) typically, lenders must give proper legal notice to the borrower, advertise the sale property, and
allow a required passage of time before the sale.
Answer: B
15) The risk of bankruptcy tends to travel with the risk of foreclosure since both can result from
financial distress. Known popularly by its section in the Federal Bankruptcy Code, which of the
following types of bankruptcy is a court-supervised workout for a troubled business?
A) Chapter 1 bankruptcy
B) Chapter 7 bankruptcy
C) Chapter 11 bankruptcy
D) Chapter 13 bankruptcy
Answer: C
Difficulty: 1 Easy
Learning Objective: 09-07 Distinguish three types of bankruptcy and what effect each has upon
foreclosure.
16) When a buyer acquires a property having an existing mortgage loan, a decision must be made
as to whether or not the subsequent owner of the property can preserve the loan. If the buyer does
not add his or her signature to the note, the buyer does not take on any personal liability. In this
case, the buyer is said to
A) assume the old loan.
B) purchase the property subject to the existing loan.
C) obtain the property through the use of a contract for deed.
D) foreclose on the property.
Answer: B
Learning Objective: 09-08 Distinguish acquiring a property "subject to" a mortgage from
assuming the mortgage.
17) Most real estate loans have a definite term to maturity, stated in years. The majority of home
loans will typically have a term to maturity between
A) one and five years.
B) five and seven years.
C) seven and fifteen years.
D) fifteenand thirty years.
Answer: D
Difficulty: 1 Easy
18) It is possible to have a secured real estate loan without a mortgage through the use of a contract
for deed. In contrast to the standard real estate sale, which of the following events occurs after the
closing when dealing with a contract for deed?
A) offer
B) acceptance
C) possession of the property passes to the buyer
D) title to the property passes to the buyer
Answer: D
19) Congress has enacted a number of regulations that have established criteria for evaluating
home loan applicants and mandating disclosures in the origination of home loans. Which of the
following congressional acts requires important disclosures concerning the cost of consumer
credit, including the computation of the annual percentage rate (APR)?
A) Equal Credit Opportunity Act (ECOA)
B) Truth-in-Lending Act (TILA)
C) Real Estate Settlement Procedures Act (RESPA)
D) Home Ownership and Equity Protection Act (HOEPA)
Answer: B
Difficulty: 1 Easy
Learning Objective: 09-09 Identify at least four major national laws affecting home mortgage
lending, and state at least three provisions of each.
20) In addition to numerous congressional acts that focus more on national regulation, laws have
been created that affect the practice of home mortgage lending at a community or neighborhood
level. For example, laws have been enacted to prevent lenders from avoiding certain
neighborhoods without regard to the merits of the individual loan applications, a practice more
commonly referred to as
A) rescinding.
B) redlining.
C) assuming.
D) holdout.
Answer: B
Difficulty: 1 Easy
21) Assume that an individual has just lost his job and has been consistently late paying his bills.
The bank recognizes deterioration in the individual's credit score and has notified him that he must
pay his home equity line of credit in full. The mortgage clause that makes this possible is known as
the
A) demand clause.
B) insurance clause.
C) escrow clause.
D) exculpatory clause.
Answer: A
22) The ability of homeowners to prepay the principal on their outstanding mortgage balance
creates cash flow uncertainty for the lender. As a result, the lender may wish to prohibit
prepayment on a mortgage loan for a specified period of time after its origination. This is
accomplished through which of the following?
A) defeasance
B) yield maintenance provision
C) demand clause
D) lockout provision
Answer: D
Difficulty: 1 Easy
23) In certain states, such as the state of Georgia, there is a temporary transfer of title to the lender
at the time the mortgage loan is made. The borrower then would obtain the rights to the title once
the loan has been repaid. These states are referred to as
A) title theory states.
B) lien theory states.
C) conforming states.
D) nonconforming states.
Answer: A
24) A special contract in which the borrower pledges the mortgaged property as security to the
lender is commonly referred to as the
A) mortgage (deed of trust).
B) listing contract.
C) note.
D) assignment of mortgage.
Answer: A
25) Even after a property goes into foreclosure, it is still possible for the borrower to reclaim the
property as long as he or she produces the outstanding mortgage balance and all foreclosure costs
incurred to that point. In a state such as Florida, this right may even extend beyond the date of the
foreclosure sale. When this occurs, this right is more commonly referred to as
A) equity of redemption.
B) statutory redemption.
C) strategic default.
D) substantive default.
Answer: B
26) In an attempt to regulate home mortgage lending after the mortgage crisis of 2007, which of
the following acts created an independent oversight agency tasked with the responsibility of
overseeing and enforcing federal consumer financial protection laws; enforcing antidiscrimination
laws in consumer finance; restricting unfair, deceptive, or abusive acts or practices; receiving
consumer complaints; promoting financial education; and watching for emerging financial risks
for consumers?
D) Dodd-Frank Wall Street Reform and Consumer Protection Act
Answer: D
Difficulty: 1 Easy
27) If a homeowner in mortgage distress owes more than the value of the home and is unable to
make the loan manageable by refinancing or modifying the mortgage, the next recourse often is a
short sale of the property. All of the following statements are true regarding a short sale except
A) legal costs should be lower with a short sale than with foreclosure.
B) a short sale usually enables a better sale price and a faster sale than foreclosure.
C) a short sale is less damaging to the borrower's credit than a foreclosure, thereby enabling the
borrower to be eligible for another mortgage loan sooner.
D) a short sale relieves the seller of any other outstanding obligations on the home, such as owner
association fees or a second mortgage.
Answer: D
Difficulty: 1 Easy
remedy for default.
28) When a borrower defaults on a mortgage loan, his or her credit record will be adversely
affected. While borrowers can recover from this reduction in their credit score, if a default goes
into the borrower's records it will remain for
A) six months.
B) one year.
C) five years.
D) seven years.
Answer: D
Difficulty: 1 Easy
remedy for default.
29) In certain states, such as the state of Florida, the transfer of title to the lender does not occur
until the borrower defaults. These states are referred to as
A) title theory states.
B) lien theory states.
C) conforming states.
D) nonconforming states.
Answer: B
30) Even after a property goes into foreclosure, it is still possible for the borrower to reclaim the
property as long as he or she produces the outstanding mortgage balance and all foreclosure costs
incurred to that point. In a state such as Georgia, this right only extends to the date of the
foreclosure sale. When this occurs, this right is more commonly referred to as
A) equity of redemption.
B) statutory redemption.
C) strategic default.
D) substantive default.
Answer: A
31) Known popularly by its section in the Federal Bankruptcy Code, which of the following types
of bankruptcy is the traditional form of bankruptcy wherein the court simply liquidates the assets
of the debtor and distributes the proceeds to creditors in proportion to their share of total claims?
Answer: B
Difficulty: 1 Easy
foreclosure.
32) Known popularly by its section in the Federal Bankruptcy Code, which of the following types
of bankruptcy is a court-supervised workout for a troubled household?
Answer: D
Difficulty: 1 Easy
foreclosure.
33) Based on your understanding of the relation between the various types of bankruptcy and the
foreclosure process, which of the following types of bankruptcy would you expect to be least
harmful to a lender's mortgage interest?
Answer: B
foreclosure.
34) Which of the following acts prohibits discrimination in lending practices on the basis of race,
color, religion, national origin, sex, marital status, age, or because all or part of an applicant's
income derives from a public assistance program?
Answer: A
Difficulty: 1 Easy
35) Which of the following acts was passed out of concern for abusive predatory practices in
subprime lending?
Answer: D
Difficulty: 1 Easy

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