Chapter 31
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
B1. A recession is a written instrument that gives a creditor an interest in real property
being acquired by a debtor as security for the debt’s payment.
B2. To refinance is to pay off an original mortgage and obtain a new one at more
favorable terms.
B3. An adjustable-rate mortgage is a standard mortgage with an unchanging rate of
interest.
B4. 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.
B5. A subprime mortgage is a loan made to a borrower who does not qualify for a
standard mortgage.
B6. A mortgage must be in writing to comply with the Statute of Frauds.
B7. Recording a mortgage “perfects” the debtor’s security interest in the property.
B8. Loan flipping occurs when a lender convinces a homeowner to refinance soon after
obtaining a mortgage.
B9. The annual percentage rate is the actual cost of a loan on a yearly basis.
B10. Lenders are required to charge prepayment penalties on most subprime mortgages
and home equity loans.
B11. If a lender fails to provide certain material disclosures, a borrower has no more than
seven days to rescind the mortgage.
B12. There are additional disclosure requirements for a loan that carries a high rate of
interest or entails high fees for the borrower.
B13. Negative amortization occurs when the monthly payments are insufficient to cover
the interest due on a loan.
B14. 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.
B15. The average prime offer rate is the rate offered to the least qualified borrowers as
established by a survey of potential borrowers.
B16. Forbearance is a process that allows a lender to legally repossess and auction off the
property securing a loan.
B17. When an owner is unable to make mortgage payments, a lender may agree to a short
sale.
B18. Under a deed in lieu of foreclosure, the property is conveyed to the lender in
satisfaction of the mortgage.
B19. If a loan is not paid within a reasonable time after a notice of default, the borrower
will receive a notice of sale.
B20. 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.
MULTIPLE CHOICE QUESTIONS
B1. Abner borrows funds from Boomtown Credit Union (BCU) to buy real property. Abner
signs a written instrument that gives BCU an interest in the property as security for
the debt’s payment. This instrument is
a. a mortgage.
b. a Treasury security.
c. a workout agreement.
d. homeowners’ insurance.
B2. 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.
B3. 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 reverse mortgage.
c. a subprime mortgage.
d. a workout agreement.
B4. Donato borrows the funds from Eveready Bank to buy real estate and build a home.
Donato’s first draw of funds pays for the land. Subsequent draws occur at various
stages of construction until the house is ready for occupancy. This is
a. a balloon mortgage.
b. a construction loan.
c. a participation loan.
d a reverse mortgage.
B5. 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.
B6. 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.
B7. 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.
B8. 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.”
B9. 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.
B10. 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.
B11. 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.
Fact Pattern 31-1B (Questions B12-B13 apply)
Northeast Bank makes mortgage loans to consumers, including Mai, to buy homes.
B12. Refer to Fact Pattern 31-1B. 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.
B13. Refer to Fact Pattern 31-1B. 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.
B14. 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.
B15. 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 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.
B16. 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. a bridge loan.
b. forbearance.
c. a reamortization.
d. a restructure.
B17. 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.
B18. 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.
B19. 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.
B20. 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
B1. 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?
B2. 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?