377
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
A1. The loan that a lender provides to enable a borrower to purchase real property is a
mortgage.
A2. The initial interest rate is the part of a purchase price that is paid up front in cash.
A3. A fixed-rate mortgage is a standard mortgage with a rate of interest that changes
periodically.
378 TEST BANK A—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY
A4. With an adjustable-rate mortgage, the rate of interest paid by the borrower changes
periodically.
A5. Due to a lower default rate, lenders charge a lower interest rate for subprime loans.
A6. A reverse mortgage starts as a fixed-rate mortgage and then converts into an
adjustable-rate mortgage.
A7. Home equity is the portion of a home’s value that is “paid off.”
A8. 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.
A9. Borrowers are required to recite the terms of their loans in clear, readily
understandable language so that lenders can make rational choices.
A10. A borrower has a right to rescind a mortgage within three business days.
CHAPTER 31: MORTGAGES & FORECLOSURES AFTER THE RECESSION 379
A11. Federal mortgage disclosure requirements apply to the written materials that a lender
provides and to any oral representations.
A12. For most purposes, a mortgage assignee of a high-cost or high-fee mortgage product
does not acquire the status of a holder in due course.
A13. 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.
A14. 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.
A15. There are additional disclosure requirements for a higher-priced mortgage loan.
A16. If a homeowner defaults, the lender has the right to foreclose on the mortgaged
property.
A17. Foreclosure is the postponement, for a limited time, of part or all of the payments on
a loan in jeopardy of repossession and sale.
380 TEST BANK A—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY
A18. Federal law encourages private lenders to modify mortgages so as to lower the
monthly payments of borrowers who are in default.
A19. In a judicial foreclosure, the lender is allowed to foreclose on and sell the property
without judicial supervision.
A20. A deficiency judgment requires a borrower to pay the amount of debt remaining after
the collateral is sold.
MULTIPLE CHOICE QUESTIONS
A1. Great Plains Bank provides a loan to enable Helene to buy real property. This loan is
a. a down payment.
b. a mortgage.
c. a short sale.
d. a workout agreement.
A2. Jaime buys a home by paying part of the purchase price up front in cash and
borrowing the rest of the funds from Valley Credit Union. The part of the price paid up
front in cash is
a. a down payment.
b. a home equity loan.
c. a reverse mortgage.
d. the average prime offer rate.
CHAPTER 31: MORTGAGES & FORECLOSURES AFTER THE RECESSION 381
A3. 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.
A4. 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.
A5. 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. a hybrid mortgage.
c. a reverse mortgage.
d. a violation of the law.
A6. Milo borrows $125,000 from North State Bank to buy a home. To comply with the
Statute of Frauds, 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.
382 TEST BANK A—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY
A7. 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.
A8. 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.
A9. Kenton borrows $150,000 from Liberty Home Finance Corporation to buy a home.
Federal law concerns primarily
a. borrowers’ ability to avoid clear terms in financing documents when the effect
may be harsh.
b. how many loans a specific lender can make.
c. the highest prices for which real property can be sold.
d. what must be disclosed with respect to a mortgage.
CHAPTER 31: MORTGAGES & FORECLOSURES AFTER THE RECESSION 383
A10. 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.
A11. Ruth owns a home on which she has two mortgages provided by Security Bank. Town
Refinance Inc. tells Ruth that it can refinance the loans to reduce her payments. Town
Refinance provides all of the required documents, which accurately state the
payments under the new loan as higher. Ruth does not read the documents. Town
Refinance is most likely liable for
a. fraud.
b. misrepresentation.
c. negative amortization.
d. nothing.
Fact Pattern 31–1A (Questions A12–A14 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.
A12. Refer to Fact Pattern 31-1A. 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.
A13. Refer to Fact Pattern 31-1A. 24-Hour Credit assigns Benny’s loan to Consolidated
Mortgage Investment Corporation. For most purposes, Consolidated
384 TEST BANK A—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY
a. acquires the status of a holder in due course (HDC).
b. has more protection than a mortgage assignee but less than an HDC.
c. is exempt from federal law with respect to mortgages.
d. is subject to claims that Benny could assert against 24-Hour Credit.
A14. Refer to Fact Pattern 31-1A. 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.
A15. 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.
CHAPTER 31: MORTGAGES & FORECLOSURES AFTER THE RECESSION 385
A16. 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.
A17. 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
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.
A18. 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.
386 TEST BANK A—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY
A19. 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.
A20. 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.
ESSAY QUESTIONS
A1. Kim’s home is valued at $250,000. Kim has paid the mortgage—she has 100 percent
equity in the property. She wants to start a new business with Lloyd. To obtain funds,
Kim refinances the loan through Metro Bank, borrowing $200,000 for fifteen years at
an interest rate of 4.85 percent. Before the loan is completed, Metro provides Kim
with all of the required disclosures. On the day of the loan, a fifteen–year Treasury
bond is yielding 2.85 percent. Kim pays $7,500 in fees to the bank. Less than a month
later, she sells her interest in the new business to Lloyd and wants to rescind the loan.
Which federal law covers this loan—TILA, HOEPA, HPML, or HAMP? Can Kim rescind
the deal? Explain.
CHAPTER 31: MORTGAGES & FORECLOSURES AFTER THE RECESSION 387
A2. Brendan borrows $150,000 from Countywide Credit Union to buy a home. The loan is
a fixed-rate mortgage at 5.5 percent with a thirty–year term secured by Brendan’s
home, which is his principal residence. When Brendan has paid off $10,000 of the
mortgage—still owing $140,000—he loses his job and defaults on the loan. The
market for homes has declined since Brendan took out the loan, and the value of the
home at the time of default is $100,000. Despite the default, Brendan assures
Countywide that he has accepted a new position, which will begin in six months. What
are Brendan’s options to recover the amount still owed on the mortgage? Which
option would most benefit these parties? Why?
388 TEST BANK A—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY