1
Chapter 26
Mortgages and Foreclosures
after the Recession
N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows.
N A question new to this edition of the Test Bank.
+ A question modified from the previous edition of the Test Bank.
= A question included in the previous edition of the Test Bank.
TRUE/FALSE QUESTIONS
1. The loan that a lender provides to enable a borrower to purchase real property
is a mortgage.
2. The initial interest rate is the part of a purchase price that is paid up front in
cash.
3. A fixed-rate mortgage is a standard mortgage with a rate of interest that
changes periodically.
4. An adjustable-rate mortgage is a standard mortgage with an unchanging rate of
interest.
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5. With an interest-only mortgage, the borrower can choose to pay only the
interest portion of the monthly payment for a specified period of time.
6. A subprime mortgage is a loan made to a borrower who does not qualify for a
standard mortgage.
7. A home equity loan starts as a fixed-rate mortgage and then converts into an
adjustable-rate mortgage.
8. Home equity is the portion of a home’s value that is “paid off.”
9. Recording a mortgage protects the creditor’s security interest in the property.
10. A prepayment penalty clause requires a borrower to pay a penalty if a
mortgage is repaid in full within a certain period.
11. Borrowers can avoid the clear meaning of terms in financing documents.
12. Loan flipping occurs when a lender convinces a homeowner to refinance soon
after obtaining a mortgage.
13. The annual percentage rate is the actual cost of a loan on a yearly basis.
14. Steering and targeting occur when a lender manipulates a borrower into
accepting a loan product that benefits the lender but is not the best loan for the
borrower.
15. If a lender fails to provide certain material disclosures, a borrower has up to
seven years to rescind the mortgage.
16. Federal mortgage disclosure requirements apply to the written materials that a
lender provides and to any oral representations.
17. A lender’s failure to comply with federal mortgage disclosure requirements
extends the borrower’s right to rescind the loan to no more than seven days.
18. A borrower has a right to rescind a mortgage within three business days.
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19. Lenders can require balloon payments for loans with terms of five years or less.
20. Negative amortization occurs when the monthly payments are insufficient to
cover the interest due on a loan.
21. There are additional disclosure requirements for a loan that carries a high rate
of interest or entails high fees for the borrower.
22. A lender can make a higher-priced mortgage loan based on the value of the
consumer’s home without verifying the consumer’s ability to repay the loan.
23. The average prime offer rate is the rate offered to the least qualified borrowers
as established by a survey of potential borrowers.
24. A lender can make a higher-priced mortgage loan based on the value of the
consumer’s home without verifying the consumer’s other credit obligations.
25. Prepayment penalties are severely restricted for a higher-priced mortgage loan.
26. If a homeowner defaults, the lender has the right to foreclose on the mortgaged
property.
27. Foreclosure is the postponement, for a limited time, of part or all of the
payments on a loan in jeopardy of repossession and sale.
28. Federal law encourages private lenders to modify mortgages so as to lower the
monthly payments of borrowers who are in default.
29. Forbearance is a process that allows a lender to legally repossess and auction
off the property securing a loan.
30. When an owner is unable to make mortgage payments, a lender may agree to
a short sale.
31. Under a deed in lieu of foreclosure, the property is conveyed to the lender in
satisfaction of the mortgage.
32. In a judicial foreclosure, the lender is allowed to foreclose on and sell the
property without judicial supervision.
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33. If a loan is not paid within a reasonable time after a notice of default, the
borrower will receive a notice of sale.
34. A borrower has the right to purchase the property after default by paying the full
amount of the debt, plus any interest and costs that have accrued.
35. A deficiency judgment requires a borrower to pay the amount of debt remaining
after the collateral is sold.
MULTIPLE CHOICE QUESTIONS
1. Liberty Bank provides Michelle with a standard mortgage with an unchanging
rate of interest to buy a home. Payments on the loan remain the same for the
duration of the mortgage. This is
a. a fixed-rate mortgage.
b. an adjustable-rate mortgage.
c. an interest-only mortgage.
d. a violation of the law.
2. Ridgeline Bank provides Stanley with a mortgage to buy a home. The rate of
interest is fixed for three years and then adjusts annually. This is
a. a fixed-rate mortgage.
b. an adjustable-rate mortgage.
c. an interest-only mortgage.
d. a violation of the law.
3. Franz asks Gateway Mortgage Credit for a loan to pay for the purchase of a
home. With a poor credit score and a high current debt–to-income ratio, Franz
does not qualify for a standard mortgage. Gateway is most likely to provide
a. a deed in lieu of foreclosure.
b. a home equity loan.
c. a subprime mortgage.
d. a workout agreement.
4. Tracy borrows $30,000 from Secure State Bank. The lender accepts Tracy’s
equity in her home as collateral, which can be seized if the loan is not repaid on
time. With respect to any proceeding that occurs if Tracy fails to make the
payments, this loan is subordinated. This means that it
a. takes a higher priority.
b. takes a lower priority.
c. has the same priority as the primary mortgage.
d. fluctuates with the market value of the property.
5. Consumer Mortgage Loans provides Demi with a mortgage to buy a home.
Under the terms, Demi can choose to pay only the interest portion of the
monthly payments and forgo paying of the principal for five years. This is
a. a fixed-rate mortgage.
b. an adjustable-rate mortgage.
c. an interest-only mortgage.
d. a violation of the law.
6. Rita borrows $30,000 from South State Credit Union. South State accepts
Rita’s equity in her home as collateral, which can be seized if the loan is not
repaid on time. This is
a. a home equity loan.
b. an adjustable-rate mortgage.
c. an interest-only mortgage.
d. a violation of the law.
7. Laurel borrows $150,000 from Marketplace Mortgage Loans to buy a home.
The financing documents require Laurel to maintain the property, obtain
homeowners’ insurance, and pay all property taxes and other assessments
through the lender. With respect to these terms, a court is most likely to
a. enforce them.
b. refuse to enforce them.
c. rescind them.
d. rewrite them.
8. Milo borrows $125,000 from North State Bank to buy a home. Because a
mortgage involves a transfer of real property, the mortgage must be
a. a highly formal document.
b. a particular form.
c. in the same format as the lender’s other loans.
d. in writing.
9. Duran applies to EZ Credit Mortgage Company for $100,000 to buy a home.
EZ Credit steers Duran toward an adjustable-rate mortgage even though he
qualifies for a fixed-rate mortgage. This is
a. a short sale.
b a subprime mortgage.
c. loan flipping.
d. steering and targeting.
10. Lorna borrows $175,000 from Mountainside Credit Union to buy a home.
Among the terms that must be disclosed under federal law is the annual
percentage rate. This is
a. the actual cost of the loan on a yearly basis.
b. the average prime offer rate.
c. the interest rate at which the loan is made.
d. the loan principal.
11. Hubert borrows $100,000 from Integrity Mortgage Mart to buy a home. Soon
after obtaining the mortgage, Integrity convinces Hubert to refinance. This is
a. a short sale.
b a subprime mortgage.
c. loan flipping.
d. steering and targeting.
12. Dahlia borrows $125,000 from Clearview Credit Union to buy a home. The
interest rate and other terms that are required to be disclosed under federal law
must be
a. based on uniform formulas of calculation.
b. expressed in lenders’ language.
c. set out in a formula unique to each loan.
d. stated in “legalese.”
13. Main Street Lenders, Inc., attempts to coerce Nolan—who specializes in
determining the value of real and personal property—into misstating the value
of a property on which a loan is to be issued. This is
a. a legal and ethical—but morally arguable—financial ploy.
b. a legal—but unethical—business practice.
c. a necessary tactic to generate a profitable loan in today’s market.
d. a violation of the law.
14. Virgil borrows $175,000 from United Finance Bank to buy a home. Federal law
regulates primarily
a. mortgage terms that must be disclosed in writing.
b. oral representations with respect to the terms of a loan.
c. the lowest prices for which real property can be sold.
d. who can buy real property, where they can buy it, and why.
Fact Pattern 26-1 (Questions 15–16 apply)
Northeast Bank makes mortgage loans to consumers, including Mai, to buy homes.
15. Refer to Fact Pattern 26-1. Under federal law, disclosures with respect to one
of Northeast’s loans must be provided
a. a certain number of days after the loan is finalized.
b. a certain number of days before the loan is finalized.
c. at the same time at which the loan is finalized.
d. at whatever time is most rational and appropriate.
16. Refer to Fact Pattern 26-1. For Mai’s loan, Northeast provides all required
disclosures. Mai has a right to rescind the mortgage
a. at any time.
b. under no circumstances.
c. within three business days.
d. within whatever period is most rational and appropriate.
17. Riverview Bank makes a mortgage loan of $95,000 to Pomeroy to buy a home.
Under federal law, if Riverview fails to provide certain material disclosures with
respect to the loan, Pomeroy’s right to rescind the loan
a. expires at midnight on the day the loan is finalized.
b. is canceled immediately.
c. is extended for up to three years.
d. is tolled for the duration of the mortgage payments.
18. Violet negotiates with Urban Credit Corporation to obtain a loan for $85,000 to
buy a home. During the negotiations, Urban Credit orally misrepresents the
terms, but provides the required documents, which accurately state the terms.
Violet does not read the documents. The party or parties most likely liable for a
violation of the law is
a. neither party.
b. Urban Credit.
c. Urban Credit and Violet.
d. Violet.
19. Shade Tree Lending Corporation advertises loans as fixed-rate loans but, in
fact, their rates or payment amounts will change. This is
a. a legal and ethical—but morally arguable—financial ruse.
b. a legal—but unethical—business practice.
c. a necessary tactic to generate a profitable loan in today’s market.
d. a violation of the law.
CHAPTER 26: MORTGAGES & FORECLOSURES AFTER THE RECESSION 13
Fact Pattern 26-2 (Questions 20–21 apply)
24-Hour Credit Corporation issues high-cost and high-fee mortgage products to
people, including Benny, who could not easily obtain credit under other loan
programs.
20. Refer to Fact Pattern 26-2. Under federal law, if 24-Hour Credit fails to provide
certain material disclosures with respect to the loan, Benny’s right to rescind
the loan
a. expires at midnight on the day the loan is finalized.
b. is immediately revoked.
c. is extended for up to three years.
d. is tolled for the duration of the loan payments.
21. Refer to Fact Pattern 26-2. Under federal law, disclosures with respect to one
of 24-Hour Credit’s loans must be provided
a. a certain number of days after the loan is finalized.
b. a certain number of days before the loan is finalized.
c. at the same time at which the loan is finalized.
d. at whatever time is most rational and appropriate.
22. Community Trust Bank provides Devlin with a mortgage to buy a home. The
rate of interest is fixed for seven years. At the end of that period, a large
payment for the entire balance of the mortgage loan is due. This payment is
a. a balloon payment.
b. a short sale.
c. an escrow account.
d. a violation of the law.
23. Hill & Dale Credit Corporation makes mortgage loans to consumers secured by
their principal homes. For a Hill & Dale loan to qualify as a Higher-Priced
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Mortgage Loan (HPML), its annual percentage rate must exceed, by a certain
amount,
a. the average prime offer rate for a comparable transaction.
b. the consumer’s income–to-debt ratio.
c. the percentage of income that a consumer can devote to its payment.
d. the projected increase in market value of the consumer’s home.
24. Property Financial Corporation makes loans that qualify, under a Federal
Reserve Board amendment to Regulation Z, as Higher-Priced Mortgage Loans
(HPMLs). Quinn applies to Property Financial for an HPML. To make the loan,
the lender must
a. convince an appraiser to inflate the value of the property.
b. impose a prepayment penalty for the duration of the loan.
c. structure the loan to specifically evade the HPML protections.
d. verify the borrower’s ability to repay the loan.
25. Money Mortgage Mart makes a mortgage loan to Natalie to allow her to buy a
home and establishes an escrow account. Most likely, this account holds
payments for
a. homeowners’ insurance and property taxes.
b. property repairs and maintenance.
c. commissions and other costs related to the purchase of the home.
d. the lender’s administrative expenses.
26. Denise borrows $90,000 from Clear Lake Credit Union to buy a home. Denise
loses her job and fails to make payments on the mortgage, but assures Clear
Lake Credit that she will soon secure a new job. The lender agrees to postpone
the payments. This is
a. foreclosure.
b. forbearance.
c. a reamortization.
d. a restructure.
27. Velma borrows $110,000 from Watershed Bank to buy a home. If she fails to
make payments on the mortgage, the bank has the right to repossess and
auction off the property securing the loan. This is
a. a short sale.
b. forbearance.
c. foreclosure.
d. the equitable right of redemption.
28. Erin and Dooley, a married couple, borrow $120,000 from Capital & Credit
Bank to buy a home. When Erin and Dooley divorce, they are unable to make
payments on the mortgage. The market value of the home has declined to less
than the balance of the loan. Capital & Credit agrees to a sale of the property
for this amount. This is
a. a deed in lieu of foreclosure.
b. a home equity loan.
c. a reverse mortgage.
d. a short sale.
29. Harbor Bay Bank has made mortgage loans to consumers that qualify for the
Home Affordable Modification Program (HAMP), which offers incentives to
lenders to change the terms of certain loans. The purpose of HAMP is to
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a. convey property through lenders to consumers who can afford it.
b. force lenders to forgive all high-risk mortgages.
c. reduce monthly payments to levels that homeowners can pay.
d. transfer affordable property to investors to lease to consumers.
30. Agnes borrows $110,000 from Bay Harbor Bank to buy a home under a
mortgage with an acceleration clause. After eighteen payments, Agnes stops
making payments on the mortgage. Bay Harbor
a. can foreclose once on the entire amount of the loan.
b. may seek only the amount of the missed payments, not the entire loan.
c. must foreclose on small amounts over time as each payment comes
due.
d must notify Agnes to accelerate the steps to cure the default.
31. Darwin borrows $200,000 from Evermore Bank to buy a home. Less than six
months into the term, Darwin stops making payments on the loan. To initiate
the process to repossess and auction off the property securing the loan,
Evermore must
a. issue a notice of sale to the borrower.
b. offer the property for sale in an auction on the courthouse steps.
c. record a notice of default with the appropriate county office.
d. resort to litigation to establish clear ownership of the property.
32. Reed borrows $150,000 from Suburban Credit Union to buy a home, which
secures the loan. Three years later, Reed stops making payments on the loan.
After Suburban Credit repossesses and auctions off the property to Tyler,
equity remains. This amount most likely belongs to
a. Reed.
b. Suburban Credit Union.
c. Tyler.
d. the county in which the property is located.
33. Seymour borrows $350,000 from Reliable Bank to buy a home. Seymour stops
making payments on the loan ten months later. After the bank repossesses the
property securing the loan but before it is sold, Seymour wants to buy it. This is
a. a deficiency judgment.
b. a reverse mortgage.
c. a violation of the law.
d. the right of redemption.
34. Upton borrows $150,000 from Valley Credit Union to buy a home, which
secures the loan. Three years into the term, Upton stops making payments on
it. Valley Credit repossesses and auctions off the property to Wesley. The sale
proceeds are not enough to cover the unpaid amount of the loan. In most
states, Valley Credit can ask a court for
a. a deficiency judgment.
b. a reverse mortgage.
c. a short sale.
d. nothing.
35. Gena borrows $350,000 from Fish Island Bank to buy a home, which secures
the mortgage. In the seventh year of the loan, Gena stops making payments.
After the bank repossesses the property but before it is sold, Gena may buy it
by paying
a. an amount that equals the potential proceeds from the property’s sale.
b an amount that exceeds the potential proceeds from the property’s sale.
c. the amount of the missed payments, but not more.
d. the full amount of the debt, plus any interest and costs.
ESSAY QUESTIONS
1. Sierra borrows $175,000 from Regional Home Finance Corporation to buy a
home. The loan is a twenty-year, 3/1, adjustable-rate mortgage, with an initial
interest rate of 4.0 percent for three years and potential increases of up to 3.0
percent to a cap of 11.0 percent. Before the loan is completed, the lender
discloses the amount of the loan principal, the initial interest rate, the initial
annual percentage rate, and associated fees and costs. Not disclosed are
material details about the amounts of the payments when the interest rate
changes. Before the first increase takes effect, Sierra decides that she wants to
rescind the loan. What is a “twenty-year, 3/1, adjustable-rate mortgage”? Can
Sierra rescind this loan? Why or why not?
2. Umberto and Tiara, who are married, borrow $110,000 from Sterling Credit
Union to buy a home. The loan is a fixed-rate mortgage at 5.25 percent with a
thirty-year term, subject to an acceleration clause, and secured by the home,
which is their principal residence. When Umberto and Tiara have paid off
$10,000 of the mortgage—still owing $100,000—they lose their jobs and stop
making payments. Sterling Credit makes numerous attempts to contact the
couple, but they do not respond. Meanwhile, the market value of their home
has declined to $85,000. After six months, Sterling Credit decides to take steps
to recover the unpaid amount of the loan. What are the lender’s options? Which
option seems most likely? Why? What are the steps are involved?
