Chapter 9
Real Estate Finance: The Laws and Contracts
Test Problems
1. The element of an adjustable interest rate that is the “moving part” is the:
2. Which of these aspects of a mortgage loan will be addressed in the note rather
than in the mortgage?
3. A lender may reserve the right to require prepayment of a loan at any time they
see fit through a(n):
4. When a buyer of a property with an existing mortgage loan acquires the property
without signing the note for the existing loan the buyer is acquiring the property:
5. Which if these points in a mortgage loan would be addressed in the mortgage
(possibly in the note as well)?
6. To finance property where either the borrower, the property, or both fail to qualify
for the standard mortgage financing, a common nonmortgage solution is through
the:
7. Ways that a lender may respond to a defaulted loan without resorting to
foreclosure include all of the following except:
8. If the lender in a standard first mortgage wishes to foreclose cost effectively, it is
crucial to have which clause in the mortgage:
9. A common risk that frequently interferes with a lender’s efforts to work out a
defaulted loan through either nonforeclosure means or foreclosure is:
10. The characteristics of a borrower than can be considered by a lender in a
mortgage loan application are limited by the:
11. The Real Estate Settlement Procedures Act does which of these:
12. Foreclosure tends to be quickest in states that:
13. From a home mortgage lender’s perspective, which statement is true about the
effect of bankruptcy upon foreclosure?
14. The most internationally oriented index rate for adjustable rate mortgages is:
15. A type of loan that has grown in volume in recent years which has raised concerns
about predatory lending practices is the:
16. A partially amortizing loan always will have
17. Which of these statements is true about mortgage loans for income producing real
estate?
18. With what type of loan security arrangement is the deed held by a neutral party
and returned upon payment of the mortgage in full?
19. The Truth in Lending Act gives some mortgage borrower how long to rescind a
mortgage loan?
20. Which statement is correct about the right of prepayment of a home mortgage
loan?
b. Most home mortgage loans have the right of prepayment without charge, but
Study Questions
1. Mortgage law is as clear, consistent, and enforceable in the United States as in
any place in the world, and far more so than in many countries. Why is this a
vital element of an efficient real estate finance system?
Solution: Clear, consistent, and enforceable mortgage law is critical to the real
estate finance system for many reasons. Since debt financing is used in most real
estate transactions, eliminating uncertainty is crucial for both parties in the
2. The Congress has adopted changes in bankruptcy law that would make Chapter 7
bankruptcy more difficult for households, requiring greater use of Chapter 13,
thus providing greater protection to unsecured credit card companies. As a
mortgage lender, do you care about this? If so, what would be your position?
Solution: The mortgage lender is entitled to the value of the mortgage
indebtedness under both Chapter 7 and Chapter 13 because their claim has
3. Residential mortgage terms (mortgage notes) have become increasingly uniform
as the mortgage market has become more national and efficient. Is there any
downside to this for the homeowner?
Solution: The increased uniformity of mortgage terms reduces the opportunity for
customization of terms based on a homeowner’s unique situation and
4. Most lenders making adjustable rate mortgage loans offer a “teaser rate.” Is this a
good policy or is it misrepresentation?
Solution: The primary concerns with “teaser rates” is that the terms of the
mortgage be transparent, and that they clearly address the interaction of periodic
5. Home mortgage lending is heavily regulated by federal laws. Is this a result of
Congressional pandering to consumer groups, or are there good reasons why
home mortgage lending should be regulated more than, say, automobile
financing?
Solution: The purchase of a home is typically the largest financial transaction
undertaken by most individuals. Unlike a car, the purchase of a home typically
cannot be readily undone by quickly selling the property to another party.
6. For your own state, determine whether:
a. It is a judicial or non-judicial foreclosure state.
b. The standard home loan is based on a deed of trust or a mortgage.
c. There is a statutory right of redemption, and, if so, how long.
d. Deficiency judgments are allowed against defaulted homeowners.
Based on this information can you judge your state is relatively debtor friendly or
borrower friendly?
7. Download one mortgage and one deed of trust from the Freddie Mac website.
Compare them to see what differences you can find in their clauses
Solution: Differences between a mortgage and a deed of trust include the
following:
A deed of trust is not a mortgage contract; it is a special kind of deed that
The trustee holds your title in trust until the debt is paid but cannot take
The primary differences between a mortgage and a deed of trust occur if the
home is foreclosed. The trustee has power of sale. Therefore, if your loan
