Chapter 09 Real Estate Finance: The Laws and

Contracts Answer Key

1. In a mortgage loan, the borrower always creates
two documents: a note and a mortgage. Which of
the following pieces of information is provided in the
mortgage?
A. How the interest rate is to be computed.
B. Whether the borrower has the right to prepay the
principal during the term of the loan, and any
prepayment penalties that would be incurred as a
result.
C. Whether the borrower is released from liability for
fulfillment of the contract.
D. Whether the lender has the right to accelerate
the loan, requiring the borrower to pay it off, in the
case that the property is sold prior to the term of the
loan.
2. A significant number of mortgage loans use
adjustable interest rates, in which the interest rate of
the loan is tied to an index rate that fluctuates over
time. For income-producing property, the most
common index rate is the:
A. one-year U.S. Treasury constant maturity rate
B. prime rate
C. London Interbank Offered Rate (LIBOR)
D. cost-of-funds index
3. Added to the index of the adjustable rate is a
margin, which is the lender's "markup." For standard
Adjustable Rate Mortgage (ARM) loans, the
average industry margin has been stable at
approximately:
A. 75 basis points
B. 175 basis points
C. 275 basis points
D. 375 basis points
4. Most Adjustable Rate Mortgage (ARM) loans
have been marketed with a temporarily reduced
interest rate commonly referred to as a:
A. rate cap
B. teaser rate
C. payment cap
D. prepayment rate

5. For most mortgage loans on commercial real

estate, the right of prepayment is constrained
through a prepayment penalty. Which of the
following types of prepayment penalties requires a
borrower to provide the lender with some
combination of U.S. Treasury securities that will
serve to replace the cash flows of the loan being
paid off?
A. Yield-maintenance prepayment penalties
B. Prepayment lockout
C. Defeasance prepayment penalty
D. Curtailment penalty

6. Because the mortgage conveys a complex claim

for a long period of time, clauses are included in
anticipation of possible future complications. Which
of the following clauses requires a borrower to make
monthly deposits into an account in order to pay
obligations such as property taxes, community
association fees, or causality insurance premiums?
A. Demand clause
B. Insurance clause
C. Escrow clause
D. Exculpatory clause
7. Certain mortgage loans contain a due-on-sale
clause, which gives the lender the right to terminate
the loan at sale of the property. Which of the
following types of loans is the most likely to contain
a due-on-sale clause?
A. Federal Housing Administration (FHA) loan
B. Veterans Affairs (VA) loan
C. Conventional home loan
D. An assumable home loan
8. Standard mortgage loans require monthly
payments typically composed of two components:
interest and principal repayments. When scheduled
mortgage payments are insufficient to pay all of the
accumulating interest, causing some interest to be
added to the outstanding balance after each
payment shortfall, the loan is said to be:
A. fully amortizing
B. partially amortizing
C. nonamortizing
D. negatively amortizing
9. One of the main distinctions between commercial
mortgage loans and residential mortgage loans lies
in the personal liability of the borrower. With
residential loans, the lender can hold the borrower
personally liable in the event of a default. Such
loans are commonly referred to as:
A. recourse loans
B. nonrecourse loans
C. conforming loans
D. nonconforming loans

10. In a mortgage agreement, the borrower conveys

to the lender a security interest in the mortgage
property. The lender, i.e. the individual who receives
the mortgage claim, is known as the:
A. broker
B. mortgagor
C. agent
D. mortgagee

11. Violations of the requirements of a note that do

not disrupt the payments on the loan tend to be
viewed as "technical" defaults. In practice, how
many days must a payment be overdue in order for
lenders to treat a default as serious?
A. One day
B. 30 days
C. 60 days
D. 90 days
12. When a borrower defaults on the payment
requirements of a loan, there are several options
that the lender has at its disposal. When the lender
allows the borrower simply to convey the property to
the lender, this is commonly referred to as:
A. Bankruptcy
B. Foreclosure
C. Deed in lieu of foreclosure
D. Equity right of redemption
13. Foreclosure is considered the ultimate recourse
of the lender because it allows the lender to bring
about sale of the property to recover the outstanding
indebtedness. All of the following statements
regarding foreclosure are true EXCEPT:
A. Foreclosure is a costly process for all parties
involved.
B. Only those claimants who are properly notified
and engaged in the foreclosure suit can lose their
claims to the property.
C. When a lender forecloses on a property, it
extinguishes all superior liens, bringing about a free
and clear sale of the property.
D. The net recovery by a lender from a foreclosed
loan seldom exceeds 80 percent of the outstanding
loan balance.

14. The difference between judicial foreclosure and

power of sale in the treatment of defaulted
mortgages can be significant. All of the following
statements regarding power of sale are true
EXCEPT:
A. The power of sale treatment is faster than judicial
foreclosure.
B. The foreclosed property is sold through a public
auction administered by the court.
C. It is less costly for power of sale to be employed
than judicial foreclosure.
D. Typically, lenders must give proper legal notice to
the borrower, advertise the sale property, and allow
a required passage of time before the sale.
15. The risk of bankruptcy tends to travel with the
risk of foreclosure since both can result from
financial distress. Known popularly by its section in
the Federal Bankruptcy Code, which of the following
types of bankruptcy is a court-supervised workout
for a troubled business?
A. Chapter 1 bankruptcy
B. Chapter 7 bankruptcy
C. Chapter 11 bankruptcy
D. Chapter 13 bankruptcy
16. When a buyer acquires a property having an
existing mortgage loan, a decision must be made as
to whether or not the subsequent owner of the
property can preserve the loan. If the buyer does
not add his or her signature to the note, the buyer
does not take on any personal liability. In this case,
the buyer is said to:
A. assume the old loan.
B. purchase the property subject to the existing
loan.
C. obtain the property through the use of a contract
for deed.
D. foreclose on the property.
17. Most real estate loans have a definite term to
maturity, stated in years. The majority of home loans
will typically have a term to maturity between:
A. 1-5 years
B. 5-7 years
C. 7-15 years
D. 15-30 years
18. It is possible to have a secured real estate loan
without a mortgage through the use of a contract for
deed. In contrast to the standard real estate sale,
which of the following events occurs after the
closing when dealing with a contract for deed?
A. Offer
B. Acceptance
C. Possession of the property passes to the buyer
D. Title to the property passes to the buyer

19. Congress has enacted a number of regulations

that have established criteria for evaluating home
loan applicants and mandating disclosures in the
origination of home loans. Which of the following
congressional acts requires important disclosures
concerning the cost of consumer credit, including
the computation of the annual percentage rate
(APR)?
A. Equal Credit Opportunity Act (ECOA)
B. Truth-in-Lending Act (TILA)
C. Real Estate Settlement Procedures Act (RESPA)
D. Home Ownership and Equity Protection Act
(HOEPA)
20. In addition to numerous congressional acts that
focus more on national regulation, laws have been
created that affect the practice of home mortgage
lending at a community or neighborhood level. For
example, laws have been enacted to prevent
lenders from avoiding certain neighborhoods without
regard to the merits of the individual loan
applications, a practice more commonly referred to
as:
A. rescinding
B. redlining
C. assuming
D. holdout
21. Assume that an individual has just lost his job
and has been consistently late paying his bills. The
bank recognizes deterioration in the individual's
credit score and has notified him that he must pay
his home equity line of credit in full. The mortgage
clause that makes this possible is known as the:
A. demand clause
B. insurance clause
C. escrow clause
D. exculpatory clause
Chapter 10 Residential Mortgage Types and
Borrower Decisions Answer Key
1. Mortgage originators can either hold loans in their
portfolios or sell them to investors. When a
mortgage originator decides to sell mortgages to an
institution, for example, this transaction occurs in
what is commonly referred to as the:
A. primary mortgage market
B. secondary mortgage market
C. over-the-counter market
D. loan origination market
2. Which of the following types of institutions has
historically been the largest purchaser of residential
mortgages?
A. Commercial banks
B. Savings and Loans
C. Government sponsored enterprise
D. Mortgage banking companies

3. Considered the most common type of home loan,

which of the following refers to any standard home
loan that is not insured or guaranteed by an agency
of the U.S. government?
A. Conventional home loan
B. Federal Housing Administration loan
C. Veterans Affairs loan
D. Section 203 loan
4. Created by Congress to promote an active
secondary market for home mortgages, Fannie Mae
and Freddie Mac purchase loans that meet specific
underwriting standards such as loan size,
documentation, and payment to income ratio. The
loans that Fannie Mae and Freddie Mac are eligible
to purchase are referred to as:
A. conventional loans
B. conforming conventional loans
C. nonconforming conventional loans
D. jumbo conventional loans
5. Since conforming loans can be much more
readily bought and sold in the secondary mortgage
market, they carry a _______ interest rate than
comparable nonconforming loans.
A. higher
B. equal
C. lower
D. more volatile
6. Mortgage originators often offer many types and
forms of available residential loans as part of their
mortgage menu. However, the predominant form of
prime conventional mortgage remains the:
A. (fixed-rate) level payment mortgage (LPM)
B. adjustable rate mortgage (ARM)
C. subprime mortgage
D. alt-A mortgage
7. Lenders generally require private mortgage
insurance (PMI) for conventional loans over 80
percent of the value of the security property. PMI
protects a lender against which of the following?
A. Losses due to default on the loan
B. Legal threat to the lender's mortgage claim
C. Physical hazards
D. Changes in the index rate associated with an
adjustable rate mortgage
8. Mortgage insurance rates vary with the perceived
riskiness of the loan. Which of the following
scenarios would result in a higher mortgage
insurance premium?
A. Lower loan-to-value ratio
B. Shorter loan term
C. Stronger credit record of the borrower
D. A "cash-out" refinancing loan

9. The Federal Housing Administration (FHA)

insures loans made by private lenders that meet
FHA's property and credit-risk standards. Which of
the following statements concerning FHA insurance
is true?
A. The insurance is paid by the lender and protects
the lender against loss due to borrower default.
B. The insurance is paid by the borrower and
protects the lender against loss due to borrower
default.
C. The insurance is paid by the lender and protects
the borrower against loss due to lender default.
D. The insurance is paid by the borrower and
protects the borrower against loss due to lender
default.
10. Federal Housing Administration (FHA) loans
differ from conventional loans in a number of ways.
All of the following statements regarding FHA loans
are true EXCEPT:
A. FHA loans are targeted toward first-time
homebuyers who are in slightly weaker financial
circumstances than the typical prime conventional
borrower.
B. FHA loans are more tolerant in terms of qualifying
debt-to-income ratios.
C. FHA loans require higher credit scores than are
needed for prime conventional loans.
D. FHA loans contain lower limits on their maximum
size than are available through conforming
conventional loans.
11. It would be hard to overstate the importance of
the Federal Housing Administration (FHA) in the
history of housing finance. Which of the following
instruments created by the FHA is considered the
single most important financial instrument in modern
housing finance?
A. Level-payment, fully amortizing loan
B. Adjustable rate mortgage
C. Partially-amortizing balloon loan
D. Subprime mortgage loan
12. Many older, retired households are considered
"house poor." Which of the following forms of loans
has been designed to help mitigate this problem by
offering additional monthly income to these
homeowners in exchange for a portion of their
housing equity?
A. Purchase-money mortgage (PMM)
B. Package mortgage
C. Home equity loan
D. Reverse mortgage

13. In recent years, home equity loans have

become a popular form of second mortgage. Their
popularity has been a result of all of the following
EXCEPT:
A. Lower interest rates than other consumer debt
B. Shorter terms than other consumer debt
C. Tax-favored status
D. Aggressive marketing by lenders
14. In contrast to conventional home loans, the
interest-only balloon loan requires the borrower to
pay off the loan with a "balloon" payment equal to
the original balance after:
A. 1-5 years
B. 5-7 years
C. 7-15 years
D. 15-30 years
15. The hybrid ARM attempts to balance the fixed
payment desire of a borrower with the lender's
desire to increase interest rates if market rates rise
in the future. In its most common form, known as a
2-28, the hybrid ARM will have a fixed-interest rate
for:
A. 1 year
B. 2 years
C. 26 years
D. 28 years
16. Mortgage loans made to borrowers with normal
credit quality, but who lack the necessary
documentation needed to meet conforming
mortgage standards would most likely be
considered:
A. subprime loans
B. option ARM loans
C. hybrid ARM loans
D. alt-A loans
17. Since mortgages typically have multiple costs
associated with them, a borrower may attempt to
reduce these costs into a single measure in order to
compare two or more mortgages. Which of the
following measures is a popular tool for comparing
the cost of several mortgages?
A. Upfront fees
B. Contracted interest rate
C. Annual percentage rate
D. Teaser rate
18. A common criticism of the annual percentage
rate (APR) is that it usually understates the true cost
of borrowing. The APR may understate the cost of
borrowing because it assumes:
A. interest rates will always rise
B. the loan always goes to maturity
C. the actual life of the loan is shorter than maturity
D. upfront fees should be ignored

19. The refinancing decision is sometimes

oversimplified into a few "rules of thumb" that a
borrower uses in order to gauge its potential
benefits. Which of the following methodologies is
criticized for its inability to account for a variation in
refinancing benefits due to cost or holding period
differences?
A. Payback period approach
B. Net benefit approach
C. Interest rate spread
D. Net present value approach
20. With the arrival of subprime mortgages in recent
years, a new kind of "trigger" event became
apparent in leading households to default. Which of
the following trigger events is primarily associated
with most defaults that have occurred during the
most recent subprime mortgage crisis?
A. Death in the family
B. Divorce
C. Unemployment
D. Mortgage payment spikes
21. Suppose a buyer agrees to purchase a tract of
land for $40,000. The buyer is only able to obtain a
mortgage for $32,000. Rather than let the deal fall
through, the seller agrees to accept $4,000 in cash
and a note from the buyer for the remaining $4,000.
This type of transaction is commonly referred to as
a:
A. conventional loan
B. home equity mortgage
C. purchase money mortgage
D. reverse mortgage
22. Suppose a homeowner is reluctant to refinance
until he is reasonably sure that interest rates are not
going to fall appreciably from where they currently
are. In this case, the homeowner appears to be
concerned about which of the following costs
associated with refinancing?
A. Opportunity cost
B. Tax consequences
C. Default risk
D. Upfront fees
23. When personal property items such as a range,
refrigerator, and household furnishings may be
included in the home loan, which usually carries a
longer term and lower interest rate than if the
borrower had financed these items with a separate
consumer loan, this is referred to as a:
A. Purchase-money mortgage (PMM)
B. Package mortgage
C. Home equity loan
D. Reverse mortgage

24. Assume that a veteran decides to purchase a

house for $150,000 using a VA loan. If the buyer
defaults on the loan, what is the maximum amount
that the VA guarantees the lender?
A. $15,000
B. $60,000
C. $75,000
D. $150,000

25. Considering the following information, what is

the NPV if the borrower refinances the loan?
Expected holding period: 15 years, Current loan
balance: $100,000, Current loan interest: 9 %, New
loan interest: 7.5 %, Cost of refinancing: $4,250
A. -$5,003
B. -$1,014
C. $5,163
D. $9,413
Chapter 11 Sources of Funds for Residential
Mortgages Answer Key
1. Total mortgage debt outstanding at the end of
2008 approached $14.6 trillion. Which of the
following types of mortgage loans accounts for the
greatest percentage of mortgage debt outstanding?
A. Residential (1-4 family)
B. Apartment (multifamily)
C. Commercial
D. Farm
2. To put into perspective the amount of residential
mortgage debt outstanding, it is useful to compare
this market to other prominent sources of available
debt. Listing the issuer with the largest amount of
debt outstanding first, which of the following choices
best depicts the relative rank ordering amongst the
major sources of outstanding debt in the U.S.?
A. Residential mortgage debt, marketable U.S.
government bonds, corporate bonds, consumer
debt
B. Marketable U.S. government bonds, residential
mortgage debt, consumer debt, corporate bonds
C. Corporate bonds, marketable U.S. government
bonds, residential mortgage debt, consumer debt
D. Consumer debt, residential mortgage debt,
marketable U.S. government bonds, corporate
bonds

3. In the early 1970's, home mortgage lenders were

predominantly depository institutions. By the end of
the decade, the growth of deposits at these
institutions became negative due to the emergence
of more attractive investment opportunities such as
money market funds. This change in the distribution
chain of funds is more commonly referred to as:
A. Deregulation
B. Disintermediation
C. Warehousing
D. Underwriting

7. Mortgage banks typically will attempt to sell loans

as quickly as possible after they are originated by
either issuing mortgage securities or selling the loan
to an intermediary that will subsequently sell the
loan in the secondary market. The period between
loan commitment and loan sale is referred to as
the:
A. mortgage pipeline
B. mortgage note
C. mortgage fallout
D. mortgage term

4. In 1989, Congress took major steps to establish

depository institution accountability by requiring
these institutions to hold more capital as they take
on riskier assets. Which of the following
Congressional acts imposed these capital standards
on depository institutions?
A. Depository Institutions Deregulation and
Monetary Control Act
B. Financial Institutions Reform, Recovery, and
Enforcement Act
C. Secure and Fair Enforcement for Mortgage
Licensing Act
D. Riegle Community Development and Regulatory
Improvement Act

8. Throughout the process of originating and selling

mortgages, mortgage companies face a number of
risks. Therefore, it is important for a lending
institution to evaluate the risks of mortgage loan
default through a process commonly referred to as:
A. mortgage fallout
B. loan servicing
C. warehousing
D. loan underwriting

5. In addition to providing home mortgages, large

commercial banks have specialized in providing
short-term funds to mortgage banking companies in
order to enable them to originate mortgage loans
and hold the loans until the mortgage banking
company can sell them in the secondary market.
This type of financing is commonly referred to as:
A. Mortgage pipeline
B. Loan servicing
C. Warehousing
D. Loan underwriting
6. The emergence of mortgage securities propelled
the development of mortgage companies, an entity
significantly different from the thrifts and banks that
previously dominated the mortgage landscape.
Which of the following parties is responsible for
providing mortgage origination services and initial
funding within this new framework?
A. Mortgage banker
B. Mortgage broker
C. Portfolio lender
D. Security analyst

9. When a mortgage is used as collateral for the

issuance of a mortgage-backed security (MBS), the
underlying mortgage is said to be "securitized." As
of 2008, approximately what percentage of
residential mortgage loans in the U.S. was being
used as collateral for the issuance of MBS?
A. 25%
B. 50%
C. 75%
D. 100%
10. In the late 1960's, Congress created a number
of agencies designed to address a struggling
secondary market for residential mortgages. Which
of the following organizations was developed
primarily to guarantee mortgage-backed securities
based on pools of FHA, VA and Rural Housing
Service loans, rather than issue, buy or sell
mortgages?
A. Federal National Mortgage Association (Fannie
Mae)
B. Government National Mortgage Association
(Ginnie Mae)
C. Federal Home Loan Mortgage Corporation
(Freddie Mac)
D. Federal Agricultural Mortgage Corporation
(Farmer Mac)

11. In the securitization process, mortgages are

pooled together and cash flows are packaged into
securities to be sold in the secondary market.
Agencies and private companies that pool
mortgages and sell mortgage-backed securities
(MBS) are often referred to as:
A. thrifts
B. credit unions
C. conduits
D. automated underwriter
12. The Federal National Mortgage Association
(Fannie Mae) was originally established to provide a
secondary market for FHA-insured and VAguaranteed loans. All of the following statements
regarding Fannie Mae are true EXCEPT:
A. Fannie Mae lends money directly to homebuyers.
B. Fannie Mae is a private, self-supporting company
with publicly traded stock.
C. Fannie Mae fully guarantees timely payment of
interest and principal to investors.
D. Fannie Mae buys both conventional home loans
and government-underwritten residential mortgages.

13. In the modern framework of home mortgage

lending, there are four channels by which first
mortgage home loans are created. Within which of
the following channels would you typically find a
Wall Street investment bank obtaining loans,
pooling loans, and creating a senior-subordinate
security structure?
A. Traditional direct (portfolio) lending
B. FHA/VA loan securitization
C. Conforming conventional loan securitization
D. Nonconforming Conventional
14. Traditional home mortgage underwriting is said
to rest on three elements, the "three C's." The
housing expense ratio is one tool that lenders will
use to address concerns associated with which of
the "three C's?"
A. Collateral
B. Creditworthiness
C. Capacity
D. Capability
15. Recently, mortgage banking has become the
natural method for doing mortgage lending. Within
the mortgage lending process, which of the
following roles serves as the primary revenue
source for mortgage banks?
A. Loan commitment
B. Loan funding
C. Loan servicing
D. Loan sales

16. Despite the risks that are inherent in the

mortgage lending process, mortgage bankers have
various tools at their disposal to hedge risk
exposure. For example, since mortgage bankers
know that only part of the loan commitments that
they issue will be taken down by borrowers, they
can purchase the right to sell a certain dollar
amount of a certain loan type in the secondary
market through what is commonly referred to as a:
A. Standby forward commitment
B. Mortgage pipeline
C. Conduit
D. Collateral
17. Suppose that a mortgage bank "locked in" an
interest rate for a prospective borrower at 8.5%.
However, prior to the loan closing, the market
mortgage rate falls to 7.5 %. In this scenario, the
mortgage banker would be most concerned with
which of the following risks?
A. Interest rate risk.
B. Pipeline fallout risk.
C. Default risk.
D. Liquidity risk.
18. The development of Fannie Mae and Freddie
Mac established the framework for a liquid
secondary market for residential mortgages. By the
fourth quarter of 2008, the share of all residential
mortgage loans owned or securitized by Fannie
Mae and Freddie Mac approached approximately:
A. 5%
B. 16%
C. 38%
D. 76%

19. Despite many innovations in the lending process

that made mortgage loans more accessible and
affordable to the general public, many potential
borrowers faced considerable barriers in qualifying
for a loan and making a down payment. Which of
the following types of loans was designed for a
borrower with weak credit or who was unable to
document his income?
A. Conventional prime home loan
B. Affordable housing loan
C. Subprime mortgage loan
D. Bridge loan

20. Loan servicing includes a number of

responsibilities such as collecting monthly mortgage
payments from the borrower, remitting principal and
interest payments to investors, ensuring sufficient
escrow payments are being made by the borrower,
and managing default if it should arise. In exchange
for these services, mortgage bankers receive a fee.
If the outstanding loan balance is $250,000 and the
annual servicing fee is 0.35%, what is the monthly
fee for servicing the loan?
A. $7.29
B. $72.92
C. $729.16
D. $7291.67
21. In ascertaining whether a borrower has the
ability to pay off his loan over time, a mortgage bank
may rely on calculating a total debt ratio as part of
its underwriting process. Utilizing the following
information, calculate the total debt ratio. Principle
and interest: $635, Tax and insurance: $125, Car
lease: $350, Gross monthly income: $2,500
A. 25.4%
B. 30.4%
C. 44.4%
D. 53.2%

Chapter 12 Real Estate Brokerage and Listing

Contracts Answer Key

1. Real estate brokers serve as intermediaries by

bringing buyers and sellers together in the real
estate market. For this service, brokers are paid
what is commonly referred to as a:
A. commission
B. licensing fee
C. recovery fee
D. listing fee
2. The importance of brokers in the real estate
market is often overlooked. In the absence of a real
estate broker, one would expect all of the following
to be true EXCEPT:
A. Real estate values would be higher.
B. A seller would most likely rely on a "thinner"
market (i.e. the seller has access to fewer
prospective buyers).
C. It would be more difficult and costly for an
individual to buy or sell a property.
D. Buyers would be more inclined to negotiate
prices downward by at least the value of a typical
commission.
3. Real estate brokers operate under the law of
agency, which gives a broker the right to act for a
principal in trying to buy or sell a property. Which of
the following types of agents is authorized by the

principal to act primarily within the confines of a

business or employment relationship?
A. Universal agent
B. General agent
C. Special agent
D. Listing agent
4. In acting as an agent for another person, the
broker carries several special responsibilities, which
by law must be adhered here to throughout the
transaction process. These responsibilities
constitute what is commonly referred to as a:
A. Subagency relationship
B. Dual agency relationship
C. Fiduciary relationship
D. Open listing relationship
5. Modern real estate brokerage normally relies on a
multiple listing service (MLS) through which brokers
have access to each other's listings. Which of the
following types of agency agreements is established
with the use of a MLS?
A. Single agency agreement
B. Subagency agreement
C. Dual agency agreement
D. Designated agent agreement
6. In dual agency, conflicts of interest may arise
since a single broker has both the listing contract
with the seller and a buyer agency agreement with
the purchaser. One way that states have attempted
to deal with this issue is to develop a new type of
brokerage relationship in which the broker assists
the buyer and seller, but does not represent either
party. This type of brokerage relationship is
commonly referred to as:
A. unintended dual agency
B. universal agency
C. transaction brokerage
D. multiple listing
7. State licensing laws generally prescribe two
levels of real estate brokerage licensing: the broker
license and the salesperson license. Which of the
following responsibilities is an individual with a
salesperson license permitted to do?
A. Own and operate a real estate brokerage
business
B. Handle money in trust for clients
C. Negotiate listing contracts or contracts for sale
D. Complete legal documents used in sales and
leases in their own name

8. All 50 states have licensing laws that regulate

persons and companies that engage in the
brokerage business. Interpreting and enforcing state
licensing laws falls under the responsibilities of
which of the following parties?
A. Broker
B. Real estate commission
C. National Association of Realtors
D. Salesperson

9. One of the traditional requirements for individuals

who wish to obtain a brokerage license has been to
demonstrate financial capacity to cover damage
judgments brought against them by clients. In order
to address this concern, some states have required
licensees to first obtain:
A. Private mortgage insurance (PMI)
B. Errors and omission insurance
C. Deposit insurance
D. Hazard insurance
10. State licensing laws prescribe behavioral
requirements with which licensees must comply to
keep their licenses. Licensing laws generally seek to
prevent brokers from partaking in all of the following
activities EXCEPT:
A. Handling money in trust for clients
B. Taking kickbacks without the employer's
knowledge
C. Offering the property at terms other than those
specified by clients
D. Failure to submit all offers to the client
11. It is common for real estate firms to identify
submarkets, such as property types or particular
sections of a city, in which they can specialize and
concentrate their transaction activity. This practice is
referred to as:
A. internet marketing
B. open listing
C. discount brokerage
D. market segmentation
12. Although the function of commercial brokerage
is the same as that of residential brokerage, the
activities of commercial brokers usually differ
considerably from those of residential brokers due
to fundamental differences in these two markets. All
of the following statements regarding commercial
brokerage are true EXCEPT:
A. Relative to residential transactions, commercial
transactions tend to be larger.
B. The parties in commercial mortgage transactions
are typically less knowledgeable than those in
residential transactions.
C. An important part of the commercial broker's
service is to provide the prospective buyer with
reports that enable him to complete due diligence
for the property.
D. Commercial brokers are often required to lower
their commission in order to negotiate compromises
between buyers and sellers when they reach an
impasse over price.

13. Blockbusting, which involves persuading an

individual to sell her home by telling her that
minority groups are moving into the neighborhood,
is one form of discrimination in housing that is
prohibited by which of the following acts of
Congress?
A. Riegle Community Development and Regulatory
Improvement Act
B. Secure and Fair Enforcement for Mortgage
Licensing Act
C. Fair Housing Act (Title VIII of the Civil Rights Act)
D. Equal Credit Opportunity Act

14. In recent years, many U.S. investors have

expanded their purchases of real estate into foreign
countries, and many foreign investors have held
interests in U.S. real estate. This is an example of
what is commonly referred to as
________________ of real estate markets.
A. deregulation
B. globalization
C. disintermediation
D. industrialization

15. Critical to any listing contract is the question of

when the broker becomes entitled to a commission.
Traditionally, the broker is still entitled to a
commission in all of the following scenarios
EXCEPT:
A. If the seller refuses to sell upon being presented
with an offer meeting the original terms and
conditions.
B. If the seller cannot deliver the property for any
reason due to his or her fault.
C. If both the buyer and seller sign a contract but
then agree to cancel it.
D. If a contract is contingent upon the buyer
obtaining financing and the buyer is unable to do so.

16. There are a number of different types of listing

contracts that can be used when marketing a
property. Which of the following types of listings
requires the broker to be paid a commission if any
other broker, or even the owner, sells the property
during the contract period?
A. Open listing
B. Multiple listing
C. Exclusive agency listing
D. Exclusive right of sale listing
17. The recent emergence of discount brokerage
services has had a modes effect on the price of
brokerage services. The average commission that a
broker could expect to receive today would most
likely range between:
A. 1-2%
B. 3-4%
C. 5-6%
D. 7-10%

18. Federal and state laws prohibit discrimination in

housing. However, exemptions do exist depending
on the particular type of property that is being
considered. All of the following activities could be
considered exempt in specific scenarios EXCEPT:
A. Refusing to sell or rent to a person because of
race.
B. Refusing to sell or rent based on familial status
(i.e. having children).
C. Refusing to sell or rent to persons based on age.
D. Refusing to sell or rent a single-family home
based on religion

19. According to the law of agency, real estate

brokers are required to observe several duties as
they act as an agent for an individual trying to buy or
sell a property. Which of the following duties refers
to a broker's obligation to be completely open and
honest with the principal?
A. Disclosure
B. Confidentiality
C. Loyalty
D. Obedience
20. In determining the appropriate listing contract to
be used, it is important to know whether a multiple
listing service (MLS) will be employed. A MLS only
accepts which of the following types of listing
contracts?
A. Open listing
B. Multiple listing
C. Exclusive agency listing
D. Exclusive right of sale listing

Chapter 13 Contracts for Sale and Closing Answer

Key
1. The successful conveyance of real estate
depends on a well-formed contract for sale since the
contract dictates the rights and type of deed
involved, as well as choreographs the entire
transaction. Which of the following features of the
contract for sale refers to the arrangements agreed
to by the parties, such as price and date of closing?
A. Contract terms
B. Contract conditions
C. Equitable title
D. Contract with contingencies
2. Any contract, whether it is for the sale of real
estate or some other entity, must contain five basic
elements. However, any contract for the sale of real
estate must adhere to two additional requirements.
Which of the following contract elements is an
additional requirement that must be satisfied in a
contract for sale of real estate that isn't necessarily
a part of other contracts?
A. Competent parties
B. Consideration
C. Offer and acceptance
D. Written form

3. While the principal parties to a transaction must

be legally competent for a contract to be valid, it is
possible for a party acting on behalf of a principal to
obtain this legal right. In order for personal
representatives and trustees to be authorized to act
on behalf of a principal, a legal instrument
commonly referred to as ____________ must be in
place.
A. assignment
B. power of attorney
C. mutual assent
D. consideration

4. Both parties to a valid and enforceable contract

must provide consideration. In a contract for the
sale and purchase of real estate, which of the
following depicts the seller's consideration?
A. A meeting of the minds with the buyer.
B. The option to present a counteroffer.
C. The property to be given up.
D. The money or goods that constitute the purchase
price.
5. In certain circumstances, mutual assent between
the contracting parties may be broken, thus
invalidating the contract. Which of the following
defects to mutual assent involves compelling a
person to act by the use of force?
A. One of the parties is under duress.
B. One of the parties is under undue influence.
C. One of the parties is under menace.
D. One of the parties is committing fraud.
6. The distinction between legal title and equitable
title is an important concept in the contract for sale
of real estate. When the buyer obtains equitable
title, the seller can no longer sell the property to
someone else, even though the legal title has not
officially passed on. In the contract for sale process,
the creation of equitable title occurs when:
A. the contract for sale is written.
B. the contract for sale is signed.
C. the contract terms are agreed upon.
D. each party is deemed legally competent.
7. Since the issues in many transactions are similar,
brokers often use standard preprinted contract
forms. Generally, the best standard form contracts
are those prepared and approved by which of the
following parties?
A. Buyer
B. Seller
C. Local Board of Realtors
D. Broker

8. Contracts for sale may contain sections that

cause implementation of the contract to depend on
the successful completion of some prior action such
as the buyer's ability to obtain financing on specified
terms. This type of contract is commonly referred to
as a(n):
A. assignment
B. equitable title
C. contract with contingencies
D. uniform settlement statement

9. In general, most contracts - including real estate

contract - can be assigned. All of the following
statements regarding assignment are true
EXCEPT:
A. Any type of personal performance contracted by
one party cannot be assigned without that party's
permission.
B. Land contracts are not assignable without the
owner's permission.
C. If buyer's of real estate assign the contract, the
new buyers may pay the agreed upon price and
obtain title to the property.
D. When buyers assign their rights to someone else,
they escape liability under the original contract.

10. When a party in a contract fails to perform (e.g.

breach of contract, nonperformance, or default) the
other party has a variety of remedies. All of the
following are remedies that an aggrieved seller may
pursue EXCEPT:
A. Sue for damages.
B. Retain the earnest money deposit as liquidated
damages.
C. Agree to rescission of the contract.
D. Sue for specific performance.

11. The final step in a real estate transaction is the

closing. In most closings, which party is responsible
for seeing that the closing is completed
successfully?
A. Escrow agent
B. Lender
C. Selling Broker
D. Listing broker
12. The Real Estate Settlement Procedures Act
(RESPA) is a federal law that requires federally
chartered or insured lenders to provide buyers and
sellers with information on all settlement costs.
According to RESPA, loan closing information must
be prepared on a special form know as the:
A. Uniform Settlement Statement or HUD-1 form
B. Good-faith estimate
C. Settlement Costs and You booklet
D. Certificate of occupancy
13. While fee splitting between cooperating real
estate brokers is permitted, RESPA explicitly
prohibits such actions as rebating part of the title
insurance premium to the lender who recommended
or required the title insurance. These unearned fees
are commonly referred to as:
A. commissions
B. kickbacks
C. damages
D. specific performance dues

14. In accordance with RESPA, whenever a buyer

obtains a new first mortgage loan from a chartered
or insured lender, when the loan is insured by the
FHA or guaranteed by the VA, or when the loan will
be sold to one of the federally related secondary
mortgage market agencies, a good-faith estimate of
the settlement costs must be provided by the lender
within:
A. 3 business days
B. 5 business days
C. 30 calendar days
D. 90 calendar days

15. When a buyer signs an offer to purchase a

property, the broker receives a monetary amount
from the purchaser of 5 or 10 percent of the
purchase price. This deposit is commonly referred
to as the:
A. commission
B. earnest money
C. closing cost
D. title insurance premium
16. Since the seller often has utilized the property
for a portion of the year in which the transaction is
being made, certain costs associated with the
property will be prorated at the closing. All of the
following items are subject to being prorated
EXCEPT:
A. Broker commission
B. Prepaid rent
C. Property tax
D. Mortgage interest

17. If property owners fail to pay their taxes in a

timely fashion, this can create a first lien on the
mortgaged property. In order to protect against this,
lenders often require that borrowers add what
fraction of their estimated tax bill to their required
monthly mortgage payments?
A. 1/12
B. 1/6
C. 1/4
D. 1/2
18. Recording documents in the public records
informs anyone who may have a potential interest in
a property of both the owner and lender. In so doing,
it provides what is commonly referred to as
____________ of an interest in real property.
A. mutual assent
B. constructive notice
C. consideration
D. simultaneous issue

19. The laws of some states require that real estate

brokers provide buyers and sellers with a list of
estimated closing costs before signing a contract for
sale. At the closing, it is typically which of the
following party's responsibilities to pay the full
premium for an owner's title insurance policy?
A. Buyer
B. Seller
C. Lender
D. Broker

20. At the closing, the buyer will be credited for a

number of costs that have been paid up front as well
as a number of prorated expenses that account for
the period of time during which the seller occupied
the house. All of the following items detailed in the
closing costs involve credits that are commonly
passed on to the buyer EXCEPT:
A. Earnest money
B. Hazard insurance premiums
C. Property taxes
D. Mortgage interest
21. Certain closing costs will be prorated to account
for the period of time during which the seller
occupied the house. If a transaction is scheduled to
close on May 17, 136 days into a 365-day year,
calculate the amount that the buyer will be credited
if the particular closing cost in question is estimated
to be $1000 for the entire year.
A. $182.19
B. $372.60
C. $624.66
D. $1000
Chapter 14 The Effects of Time and Risk on Value
Answer Key

1. Risk is the possibility that actual outcomes will

vary from what was expected when the asset was
purchased. If investors require a higher rate of
return for undertaking more risk, the underlying
assumption is that investors are:
A. risk neutral
B. risk averse
C. risk taking
D. hedging risk
2. Since investors prefer to have money now rather
than later, money received next week, instead of
today, is not worth as much to those receiving it.
Therefore an adjustment to the prospective cash
flows is required. This process is referred to as:
A. compounding
B. discounting
C. amortizing
D. hedging
3. Assume an investor with $5000 to invest is
considering several alternatives, each covering ten
years. Which of the following alternatives would you
expect the investor to choose accounting for the
time-value-of-money in your calculations?
A. Investor receives $500 at the end of year 1, plus
the original $5000 at the end of year 10.
B. Investor receives $50 at the end of each year for
10 years, plus the original $5000 at the end of 10
years.
C. Investor receives $500 at the end of the 10th year,
plus the original $5000.

D. Investor receives $5000 at the end of year 10.

4. When discussing time-value-of-money it is
necessary to understand some key terminology.
Which of the following terms refers to a fixed
amount of money paid or received at the end of
every period (i.e. a series of equal lump sums)?
A. Future value
B. Present value
C. Ordinary annuity
D. Annuity due
5. With compound interest, the investor earns
interest on the principal amount invested plus
interest on accumulated interest. Which of the
following compounding frequencies would yield the
investor the greatest ending balance assuming all
else is equal?
A. Daily
B. Monthly
C. Quarterly
D. Annually
6. Assuming all else the same, the future value of
an annuity due will be _____________ that of an
ordinary annuity.
A. Greater than
B. Equal to
C. Less than
D. Incomparable to
7. The internal rate of return (IRR) and the net
present value (NPV) are tools that are widely used
in real estate investment and finance decision
making. An investor would most likely pursue an
investment if which of the following circumstances
was true?
A. The going-in IRR exceeds the investor's required
rate of return.
B. The going-in IRR is less than the investor's
required rate of return.
C. The NPV is negative.
D. The NPV is equal to zero.
8. The rate that is used to discount expected future
cash flows can be thought of as the return the
investor is forgoing on an alternative investment of
equal risk. In this framework, the discount rate is
being thought of as which of the following?
A. Net present value
B. Opportunity cost
C. Closing cost
D. Future value
9. The Real Estate Research Corporation (RERC)
regularly surveys a sample of institutional investors
and managers in order to gain insight into the
required returns and risk adjustments used by
industry professionals when making real estate
acquisitions. Most of the properties that RERC

examines are large, relatively new, located in major

metropolitan areas and fully or substantially leased.
These classifications of properties are commonly
referred to as:
A. investment grade properties
B. speculative grade properties
C. net-lease properties
D. industrial properties
10. Uncertainty of cash flows can vary significantly
across property types. Which of the following
property types is often considered to have the most
uncertain expected cash flows?
A. Multifamily
B. Industrial
C. Office
D. Hospitality

11. Suppose an investor deposits $2500 in an

interest-bearing account at her local bank. The
account pays 2.5% interest compounded annually. If
the investor plans on withdrawing the original
principal plus accumulated interested at the end of 7
years, what is the total amount that she should
expect to receive assuming interest rates do not
change?
A. $2,971.71
B. $2,974.89
C. $3,532.43
D. $11,920.93

12. Suppose that a tenant is interested in renting out

a two-bedroom apartment for $1000 a month for the
next year. While the tenant requires rent to be paid
at the beginning of the month, he will not be
depositing the rental check into a local savings
account until the end of each month. If the annual
interest that the tenant can earn on this account is
5% and interest is compounded monthly, how much
will the tenant have in his savings account at the
end of the year?
A. $12,278.86
B. $12,613.94
C. $13,330.02
D. $15,917.13
13. An investor agreed to sell a warehouse 5 years
from now to the tenant who currently rents the
space. The tenant will continue to pay $20,000 rent
at the beginning of each year including year five in
which he will purchase the building for an additional
$150,000. Assuming the investor's required rate of
return is 10%, how much is this deal presently worth
to the investor who was willing to sell?
A. $168,953.93
B. $241, 451.07
C. $363,678.50
D. $1,032,475.67
14. Assuming that an investor requires a 10%
annual yield over the next 12 years, how much
would she be willing to pay for the right to receive
$20,000 at the end of year 12?
A. $6,053.91
B. $6,372.62
C. $62,768.57
D. $136,273.84
15. Assume that an individual puts $10,000 into a
savings account that pays 3% interest compounded
monthly with the intent to withdraw the balance in 5
years to buy a car. If he does not make any further
deposits over this period, how much will the
individual be able to put towards his purchase?
A. $10,125.63
B. $11,592.74
C. $11,616.17
D. $58,916.03
16. The purchase price of a piece of property is
$70,000. After analysis of the cash flows, expected
sales price, and expected yield, the investor decides
the deal has a present value (PV) of $80,000. What
is the net present value (NPV), and should the
investor take the deal?
A. $10,000; Yes
B. $10,000; No
C. -$10,000; Yes
D. -$10,000; No

17. Suppose an investor is interested in purchasing

the following income producing property at a current
market price of $450,000. The prospective buyer
has estimated the expected cash flows over the
next four years to be as follows: Year 1 = $40,000,
Year 2 = $45,000, Year 3 = $50,000, Year 4 =
$55,000. Assuming that the required rate of return is
12% and the estimated proceeds from selling the
property at the end of year four is $500,000, what is
the NPV of the project?
A. $8,829.96
B. $9,889.56
C. $428,113.65
D. $459,889.56

18. Assume that an industrial building can be

purchased for $1,500,000 today, is expected to yield
cash flows of $80,000 for each of the next five
years, and can be sold at the end of the fifth year for
$1,625,000. Calculate the internal rate of return
(IRR) for this transaction.
A. 3.14%
B. 7.07%
C. 9.20%
D. 10.37%
19. Assume that a piece of land is currently value at
$50,000. If this piece of land is expected to
appreciate at an annual rate of 5% per year for the
next 20 years, how much will the land be worth 20
years from now?
A. $100,898.99
B. $112,633.09
C. $123,860.81
D. $132,664.89

20. An investor originally paid $22,000 for a vacant

lot 12 years ago. If the investor is able to sell the lot
today for $62,000, what would his annual rate of
return be on this investment?
A. 5%
B. 7%
C. 9%
D. 11%
21. An investor just purchased an office building for
$100,000. He knows for certain that he can sell the
building for $110,000 in 5 years. Approximately how
much does he need to charge in annual rent in
order to achieve a 15% annual return on the deal?
A. $2,500
B. $8,000
C. $13,500
D. $20,500
Chapter 15 Mortgage Calculations and Decisions
Answer Key

1. The monthly mortgage payment divided by the

loan amount is commonly referred to as the:
A. loan balance
B. effective borrowing cost
C. lender's yield
D. monthly loan constant

2. From the borrower's perspective, the effective

borrowing cost is often viewed as the implied
internal rate of return (IRR), since it takes into
consideration costs that the borrower faces, but

which are not passed on as income to the lender.

Included in this calculation are closing costs, which
may consist of all of the following EXCEPT:
A. Title insurance
B. Mortgage insurance
C. Recording fees
D. Earnest money
3. Required by the Truth-in-Lending Act, the annual
percentage rate (APR) is reported by the lender to
the borrower on virtually all U.S. home mortgage
loans. The APR accounts for all of the following
EXCEPT:
A. All finance charges in connection with the loan,
such as discount points, origination fees, and
underwriting fees.
B. All compensation to the originating brokers if one
was used by the borrower.
C. Any prepayment of principal to be made on the
loan.
D. Premiums for required forms of insurance.

4. When lenders charge discount points (prepaid

interest) on a loan, what impact does this have on
the loan's yield?
A. The yield on the loan will increase.
B. The yield on the loan will decrease.
C. The yield on the loan will be unaffected.
D. The yield on the loan automatically becomes
zero.
5. For the purposes of estimating the effective
borrowing cost (EBC), only those up-front expenses
associated with obtaining the mortgage should be
included. With this in mind, which of the following
costs should not be included in one's calculation of
EBC?
A. Discount points
B. Loan origination fees
C. Appraisal fee
D. Buyer's title insurance
6. When fully amortizing loans call for equal periodic
payments over the life of the loan they are known
as:
A. level-payment mortgages
B. adjustable-rate mortgages
C. interest-only mortgages
D. early-payment mortgages
7. While a variety of loan terms are available in a
lender's mortgage menu, the most common loan
term on a level-payment mortgage is:
A. 7 years
B. 15 years
C. 30 years
D. 40 years

8. Recently, 15-year mortgages have increased in

popularity amongst both borrowers and lenders.
Which of the following groups of borrowers would
typically be the least interested in a 15-year
mortgage?
A. Mature households with minimal financial
constraints
B. First-time homebuyers
C. Homeowners who are refinancing to obtain a
lower rate than is available on a comparable 30year mortgage
D. Homeowners who are interested in selling their
property within five years
9. Assume that a borrower has a choice between
two comparable fixed-rate mortgage loans with the
same interest rate, but different mortgage terms,
one being a 30-year mortgage and the other a 15year mortgage. Under financially unconstrained
circumstances, which of the following statements
best describes the borrower's preference?
A. The borrower would prefer the 30-year mortgage.
B. The borrower would prefer the 15-year mortgage.
C. The borrower would be indifferent between the
two mortgages.
D. The borrower is unable to compare mortgage
loans of two different maturities.
10. Partially amortizing mortgage loans require
periodic payments of principal, but are not paid off
completely over the loan's term to maturity. Instead,
the balance of the principal amount is paid at
maturity in what is commonly referred to as a:
A. balloon payment
B. early payment
C. up-front payment
D. payment cap
11. With the recent popularity of adjustable-rate
mortgages (ARM), lenders have begun to offer
ARMs with different adjustment periods. Which of
the following ARM choices will most likely have the
highest initial rate?
A. Three-year-one-year ARM
B. Five-year-one-year ARM
C. Seven-year-one-year ARM
D. Ten-year-one-year ARM
12. In considering a three-year-one-year adjustablerate mortgage (ARM), the interest rate will be fixed
for how many years?
A. One year
B. Two years
C. Three years
D. Four years

13. One reason why adjustable-rate mortgages

(ARMs) have become popular has to do with the

impact that they have on the interest rate risk that is

borne by the parties involved. If interest rates were
to rise on a level-payment mortgage (LPM) the
interest rate risk of the loan would typically be borne
by:
A. the borrower only
B. the lender only
C. both the borrower and lender
D. neither the borrower nor the lender
14. To encourage borrowers to accept adjustable
rate mortgages (ARMs) rather than level-payment
mortgages, mortgage originators generally offer an
initial short-term introductory rate that is less than
the prevailing market mortgage rate. This rate is
referred to as a(n):
A. floating rate
B. teaser rate
C. index rate
D. discount rate
15. Given the following information on a fixed-rate
loan, determine the maximum amount that the
lender will be willing to provide to the borrower.
Loan Term: 30 years, Monthly Payment: $800,
Interest Rate: 6%.
A. $6,707
B. $9,295.15
C. $13,333
D. $133,433
16. Given the following information on a 30-year
fixed-payment loan, determine the remaining
balance that the borrower has at the end of seven
years. Interest Rate: 7%, Monthly Payment: $1,200.
A. $17,143
B. $79,509
C. $164,402
D. $180,369

17. Given the following information on an interestonly mortgage, calculate the monthly mortgage
payment. Loan amount: $56,000, Term: 15 years,
Interest Rate: 7.5%.
A. $169.13
B. $350
C. $519.13
D. $4,200
18. Given the following information, calculate the
balloon payment for a partially amortized mortgage.
Loan amount: $84,000, Term to maturity: 7 years,
Amortization Term: 30 years, Interest rate: 4.5%,
Monthly Payment: $425.62.
A. $9,458
B. $30,620
C. $73,103
D. $84,000
a19. Given the following information, calculate the
lender's yield. Loan amount: $166,950, Term: 30
years, Interest rate: 8 %, Payment: $1,225.00,
Discount points: 2.
A. 7.7%
B. 8.0%
C. 8.2 %
D. 10.0 %
20. Given the following information, calculate the
effective borrowing cost (EBC). Loan amount:
$166,950, Term: 30 years, Interest rate: 8 %,
Payment: $1,225.00, Discount points: 2, Other
Closing Expenses: $3,611.
A. 7.7%
B. 8.2%
C. 8.5%
D. 9.1%