National Flood Insurance Act and Mortgage Market Quiz
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Questions and Answers

What is a Real Estate Investment Trust (REIT)?

  • Real estate investments subject to taxation based on their annual earnings
  • Investors personally manage their real estate investments
  • Investors purchase trust certificates to invest in real estate assets (correct)
  • A group of investors who pool their funds to purchase real estate

    • Which type of investment entity involves all members both owning and managing it together?

  • Syndicate
  • Direct Investor
  • General Partnership (correct)
  • Limited Partnership

    • What does capital gain refer to when selling a residence?

  • Amount realized from the sale minus adjusted basis (correct)
  • Total selling costs of the residence
  • Total selling price of the residence
  • Initial purchase price of the residence

    • What is the purpose of Cost Recovery (Depreciation) in real estate investments?

    <p>To reduce taxable income by deducting a portion of the property's value each year</p> Signup and view all the answers

    How is Net Operating Income (NOI) calculated in real estate investments?

    <p>Gross Operating Income minus Operating Expenses &amp; Reserves</p> Signup and view all the answers

    What is the formula for calculating Taxable Earnings in real estate investments?

    <p>Net Operating Income (NOI) plus reserves, minus interest and depreciation</p> Signup and view all the answers

    What is the main purpose of a promissory note in a mortgage transaction?

    <p>To provide a written promise to repay the loan</p> Signup and view all the answers

    Which financial element represents the initial capital borrowed on which interest payments are calculated?

    <p>Principal amount</p> Signup and view all the answers

    What does the loan origination fee represent in a mortgage transaction?

    <p>One percent of the loan amount</p> Signup and view all the answers

    How is equity defined in a mortgage transaction?

    <p>Difference between market value and loan balance</p> Signup and view all the answers

    What is hypothecation in relation to a mortgage loan?

    <p>Using real estate as security for the loan</p> Signup and view all the answers

    In a trust deed transaction, what is the purpose of the promissory note?

    <p>To provide a written promise to repay the loan</p> Signup and view all the answers

    What type of mortgage requires a lump-sum payment at the end of the term?

    <p>Partially amortized mortgages with a balloon payment</p> Signup and view all the answers

    Which loan type has payments that are interest-only, with the principal balance retired in full at maturity using a balloon payment?

    <p>Interest-only loans</p> Signup and view all the answers

    What does leverage refer to in real estate investing?

    <p>Relationship between yield rate and borrowed funds interest rate</p> Signup and view all the answers

    Which type of mortgage allows financing personal property along with mortgage loans?

    <p>Package mortgage</p> Signup and view all the answers

    What is the purpose of a reverse annuity mortgage?

    <p>To provide periodic payments in exchange for equity liquidation</p> Signup and view all the answers

    What defines liquidity in investments?

    <p>The degree to which an investment is readily marketable</p> Signup and view all the answers

    'Asset' is defined as:

    <p>'A tangible or intangible item of value'</p> Signup and view all the answers

    'Basis' in real estate refers to:

    <p>'A measurement of how much is invested in the property for tax purposes'</p> Signup and view all the answers

    'Cash flow' in real estate investments is:

    <p>'The remaining positive or negative income an investment produces'</p> Signup and view all the answers

    What is the primary purpose of the National Flood Insurance Act?

    <p>To provide insurance for homeowners in designated flood-hazard areas</p> Signup and view all the answers

    Which entity sets the reserve requirement for member banks in the US?

    <p>Federal Reserve</p> Signup and view all the answers

    What is the function of the Federal Home Loan Bank System (FHLBS) in relation to savings & loan associations?

    <p>Acts as a counterpart to the Federal Reserve</p> Signup and view all the answers

    Which entity guarantees payment on certain types of loans in the US financial system?

    <p>Ginnie Mae</p> Signup and view all the answers

    What is the role of a mortgage loan originator in the lending process?

    <p>Soliciting and negotiating mortgage loans</p> Signup and view all the answers

    Which type of mortgage typically requires a 20% down payment?

    <p>Conventional mortgages</p> Signup and view all the answers

    What happens in negative amortization with regards to mortgage payments?

    <p>Unpaid monthly amounts are added to the principal balance</p> Signup and view all the answers

    What is the distinguishing feature of an adjustable rate mortgage?

    <p>Interest rates fluctuate based on an index</p> Signup and view all the answers

    What is the function of rate and payment caps in adjustable mortgages?

    <p>Protecting borrowers from unaffordable increases</p> Signup and view all the answers

    How do index and margin function in adjustable rate mortgages?

    <p>They result in adjustments to payments.</p> Signup and view all the answers

    What is the purpose of redemption clauses in loan agreements?

    <p>To allow borrowers to satisfy demands without facing adverse consequences</p> Signup and view all the answers

    When do release clauses come into effect in loan agreements?

    <p>Upon full payment completion by debtors</p> Signup and view all the answers

    What do defeasance clauses require after successful repayments?

    <p>Mortgage releases executed by lending institutions</p> Signup and view all the answers

    Under the Equal Credit Opportunity Act, what is prohibited as a basis for rejecting credit?

    <p>Reduced earnings from part-time employment</p> Signup and view all the answers

    How is a borrower's income qualified when applying for a loan?

    <p>Income ratio and debt ratio are taken into account</p> Signup and view all the answers

    What is the purpose of Private Mortgage Insurance (PMI) when LTVs become too risky for lenders?

    <p>To insure portions of the purchase price</p> Signup and view all the answers

    Which law prohibits discrimination in lending based on factors like race or religion?

    <p>Equal Credit Opportunity Act (ECOA)</p> Signup and view all the answers

    'Loan-to-Value Ratio (LTV)' expresses the loan amount as a percentage relationship to which value?

    <p>0.8</p> Signup and view all the answers

    What does the trust deed do in a deed of trust arrangement?

    <p>Transfers ownership of the borrower's property to a trustee</p> Signup and view all the answers

    What does the Real Estate Settlement Procedures Act (RESPA) regulate?

    <p>Amount of funds lenders can require for taxes and insurance</p> Signup and view all the answers

    What is the purpose of private mortgage insurance (PMI)?

    <p>To protect lenders from losses due to borrower defaults</p> Signup and view all the answers

    What does the Condemnation Clause specify in a mortgage agreement?

    <p>Procedure if property is condemned or taken through eminent domain</p> Signup and view all the answers

    What is the purpose of an escrow account in a mortgage agreement?

    <p>To hold funds for taxes and insurance payments</p> Signup and view all the answers

    What happens if a borrower sells their interest in a property without consent in a Due-on-Sale Clause situation?

    <p>Immediate repayment of the loan can be demanded</p> Signup and view all the answers

    What is the meaning of PITI in relation to mortgage payments?

    <p>Principal, Interest, Taxes, and Insurance</p> Signup and view all the answers

    What obligation does the borrower have regarding property insurance?

    <p>Insure the property according to the lender's requirements</p> Signup and view all the answers

    What action can lenders take if borrowers jeopardize a property’s value?

    <p>Take steps necessary to protect their rights in the property</p> Signup and view all the answers

    Under what condition can reinstatement occur for borrowers who defaulted on loan obligations?

    <p>Conditions like paying overdue balances and expenses must be met</p> Signup and view all the answers

    Which financial element refers to the charge for borrowing money, with a fixed or variable rate?

    <p>Interest</p> Signup and view all the answers

    What does the loan-to-value ratio (LTV) represent in a mortgage transaction?

    <p>The loan's share of the total property value</p> Signup and view all the answers

    What is the main purpose of a trust deed in a deed of trust arrangement?

    <p>Recording a lien against the borrower's property</p> Signup and view all the answers

    What does hypothecation refer to in relation to a mortgage loan?

    <p>Using real estate as security for a mortgage loan</p> Signup and view all the answers

    What is the difference between principal amount and loan balance in a mortgage transaction?

    <p>Principal amount is the initial capital borrowed, while loan balance is the remaining unpaid principal.</p> Signup and view all the answers

    What is the purpose of an annual percentage rate (APR) in a mortgage transaction?

    <p>Calculating interest and other finance charges</p> Signup and view all the answers

    What characterizes a Real Estate Investment Trust (REIT) investment?

    <p>Returns are shared among investors based on ownership percentage.</p> Signup and view all the answers

    In real estate investments, what does 'negative leverage' refer to?

    <p>Fluctuations in prices cause financial losses.</p> Signup and view all the answers

    What obligation does the seller of a primary residence have concerning taxes when it is sold?

    <p>The seller is responsible for paying taxes on capital gains from the sale.</p> Signup and view all the answers

    Which type of investment entity involves investors purchasing trust certificates to invest in real estate assets?

    <p>Real Estate Investment Trust (REIT)</p> Signup and view all the answers

    What is the purpose of the calculation formula for 'Net cash flow after taxes'?

    <p>To determine the tax liability on the property.</p> Signup and view all the answers

    What does 'Cost recovery, or depreciation' allow real estate investors to do?

    <p>Deduct a portion of property's value annually from gross income as defined by tax laws.</p> Signup and view all the answers

    What do redemption clauses in loan agreements allow borrowers to do?

    <p>Avoid adverse consequences by satisfying demands placed by creditors</p> Signup and view all the answers

    When do release clauses come into effect in loan agreements?

    <p>Upon successful repayments</p> Signup and view all the answers

    What is the purpose of defeasance clauses?

    <p>Require mortgage releases after successful repayments</p> Signup and view all the answers

    Under what Act must lenders assess an applicant's income and credit information on their own merit?

    <p>Equal Credit Opportunity Act</p> Signup and view all the answers

    What is the range for income ratios used in qualifying borrowers for loans?

    <p>25-28%</p> Signup and view all the answers

    What does Private Mortgage Insurance (PMI) help decrease when LTVs become too risky for conventional lenders?

    <p>High-risk situations</p> Signup and view all the answers

    What does Truth-in-Lending and Regulation Z enforce before closing on a loan?

    <p>Disclosure of finance charges and APR</p> Signup and view all the answers

    What is the function of the Equal Credit Opportunity Act?

    <p>Prohibits discrimination in lending based on various factors</p> Signup and view all the answers

    What does Real Estate Settlement Procedures Act (RESPA) standardize?

    <p>Buyers' comprehension of settlement costs</p> Signup and view all the answers

    What is the purpose of Capital Recovery (Depreciation) in real estate investments?

    <p>To reduce PMI insurance costs</p> Signup and view all the answers

    What type of mortgage involves pledging equity to a lender in exchange for periodic payments?

    <p>Reverse annuity mortgage</p> Signup and view all the answers

    Which loan type has payments that are interest-only, with the principal balance retired in full at maturity using a balloon payment?

    <p>Reverse annuity mortgage</p> Signup and view all the answers

    What is the primary purpose of a purchase money mortgage?

    <p>Covering portions of the purchase price using property as collateral</p> Signup and view all the answers

    What does the term 'equity' represent in real estate?

    <p>The portion of a property's value owned by the legal owner</p> Signup and view all the answers

    What is the distinguishing feature of an adjustable rate mortgage?

    <p>Low initial interest rates that increase over time</p> Signup and view all the answers

    What financial arrangement involves receiving periodic receipt of equity liquidation in exchange for an increase in debt owed on the property?

    <p>Reverse annuity mortgage</p> Signup and view all the answers

    'Package mortgage' deals with financing articles of personal property as part of which transaction?

    <p>Home purchase</p> Signup and view all the answers

    'Partially amortized mortgages with a balloon payment' require a lump-sum payment because payments do not retire what over the life of the loan?

    <p>'Principal balance'</p> Signup and view all the answers

    'Loan-to-Value Ratio (LTV)' expresses the relationship between which two elements?

    <p>'Loan amount' and 'home purchase price'</p> Signup and view all the answers

    In real estate, what does 'capital gain (or loss)' represent?

    <p>The difference between net sales proceeds and adjusted basis.</p> Signup and view all the answers

    What does a deed of trust do in a real estate transaction?

    <p>Transfers ownership of the borrower's property to a trustee</p> Signup and view all the answers

    What is the purpose of private mortgage insurance (PMI) in real estate transactions?

    <p>Protects lenders from losses due to borrower defaults</p> Signup and view all the answers

    What is the significance of the Real Estate Settlement Procedures Act (RESPA) in mortgage agreements?

    <p>Limits the amount lenders can require for taxes and insurance</p> Signup and view all the answers

    What must a borrower ensure regarding property insurance in a mortgage agreement?

    <p>Meeting lender's insurance requirements</p> Signup and view all the answers

    Under what circumstances can lenders demand immediate repayment from borrowers according to the Transfer of Property/Beneficial Interest clause?

    <p>If borrowers sell their interest without consent</p> Signup and view all the answers

    What action can lenders take if borrowers misuse a property for illegal purposes?

    <p>Bill borrowers for any costs associated with protecting their rights in the property</p> Signup and view all the answers

    What does PITI stand for in relation to mortgage payments?

    <p>Principal, interest, taxes, insurance</p> Signup and view all the answers

    'Acceleration' in mortgage agreements refers to what?

    <p>Requirement calling for settlement prior scheduled dates</p> Signup and view all the answers

    What is the main responsibility of borrowers of 'federally-related loans' in designated flood-hazard areas?

    <p>To obtain homeowners insurance</p> Signup and view all the answers

    How does the Federal Reserve control money supply among banks?

    <p>By selling government bonds to decrease money supply</p> Signup and view all the answers

    What is the function of the Federal Deposit Insurance Corporation (FDIC) in the financial system?

    <p>Insures deposits up to $250,000 per depositor per insured bank account ownership category</p> Signup and view all the answers

    What is one of the functions of the Federal Home Loan Bank System (FHLBS) in relation to savings & loan associations?

    <p>Stimulates and expands agricultural credit availability</p> Signup and view all the answers

    What distinguishes mortgage loan originators from brokers and bankers in the lending process?

    <p>They require an MLO license and solicit/negotiate mortgage loans</p> Signup and view all the answers

    Which entity is responsible for setting the reserve requirement for member banks in the US?

    <p>Federal Reserve</p> Signup and view all the answers

    What role do FNMA and FHLMC play in the mortgage market?

    <p>Buy conventional loans and pooled mortgages</p> Signup and view all the answers

    What is a distinguishing feature of adjustable rate mortgages (ARMs) compared to fixed-rate mortgages?

    <p>Interest rates fluctuate based on an index</p> Signup and view all the answers

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