Question 1

A major benefit of a PLAM is the mortgage payment increases closely follows borrower salary increases.

Accepted Answer

A) True 
 B)False  False

Question 2

The floor of an ARM is the maximum reduction of payments or interest rates allowed.

Accepted Answer

A) True 
 B)False  True

Question 3

Under which scenario is negative amortization likely to occur?

Accepted Answer

A) Option A 
B) Option B 
C) Option C 
D) Option D 
A) Option A 
B) Option B 
C) Option C 
D) Option D C

Question 4

ARMs were developed because lenders were tired of offering a limited selection of loan alternatives to borrowers.

Accepted Answer

A) True 
 B)False

Question 5

In order to calculate the APR for an ARM,you must,

Accepted Answer

A) Only use the first year's given interest rate 
B) Estimate interest rates over the life of the loan 
C) Assume the worst case scenario and use interest rates at their highest possible point over the life of the loan 
D) Use only the first five year's interest rates because they can easily be estimated and most people only own a property for five years 
A) Only use the first year's given interest rate 
B) Estimate interest rates over the life of the loan 
C) Assume the worst case scenario and use interest rates at their highest possible point over the life of the loan 
D) Use only the first five year's interest rates because they can easily be estimated and most people only own a property for five years

Question 6

Which is NOT a component of an ARM?

Accepted Answer

A) A margin 
B) An index 
C) A chapter 
D) Caps 
A) A margin 
B) An index 
C) A chapter 
D) Caps

Question 7

Which loan in the above table is a FRM?

Accepted Answer

A) Loan 1 
B) Loan 2 
C) Loan 3 
D) Loan 4 
A) Loan 1 
B) Loan 2 
C) Loan 3 
D) Loan 4

Question 8

A borrower takes out a 30-year adjustable rate mortgage loan for $200,000 with monthly payments.The first two years of the loan have a "teaser" rate of 4%,after that,the rate can reset with a 5% annual payment cap.On the reset date,the composite rate is 6%.Assume that the loan allows for negative amortization.What would be the outstanding balance on the loan at the end of Year 3?

Accepted Answer

A) $190,074 
B) $192,337 
C) $192,812 
D) $192,926 
A) $190,074 
B) $192,337 
C) $192,812 
D) $192,926

Question 9

Lender's can partially avoid estimating interest rates by tying an ARM to an interest rate index.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following is a disadvantage of PLAMs?

Accepted Answer

A) Lenders face high levels of interest rate risk under PLAMs. 
B) Fewer homebuyers are likely to qualify for financing using PLAMs in comparison to CPMs. 
C) The price level used to index PLAMs is measured on an ex post basis and historic prices may not be an accurate reflection of future price. 
D) All of the above. 
A) Lenders face high levels of interest rate risk under PLAMs. 
B) Fewer homebuyers are likely to qualify for financing using PLAMs in comparison to CPMs. 
C) The price level used to index PLAMs is measured on an ex post basis and historic prices may not be an accurate reflection of future price. 
D) All of the above.

Question 11

Given that every other factor is equal,which of the following ARMs will have the lowest expected cost?

Accepted Answer

A) An ARM with payment caps and negative amortization 
B) An ARM with interest rate caps 
C) An ARM with a longer adjustment interval 
D) An ARM with no caps or limitations 
A) An ARM with payment caps and negative amortization 
B) An ARM with interest rate caps 
C) An ARM with a longer adjustment interval 
D) An ARM with no caps or limitations

Question 12

A borrower takes out a 30-year adjustable rate mortgage loan for $200,000 with monthly payments.The first two years of the loan have a "teaser" rate of 4%,after that,the rate can reset with a 2% annual rate cap.On the reset date,the composite rate is 5%.What would the Year 3 monthly payment be?

Accepted Answer

A) $955 
B) $1,067 
C) $1,071 
D) $1,186 
A) $955 
B) $1,067 
C) $1,071 
D) $1,186

Question 13

A borrower takes a 30-year,fully amortizing,5/1 ARM for $225,000 with an initial interest rate of 4.375%.Assuming the index on which the loan rate is based rises by 1% in the fourth year of the loan and remains at that level,what will the payment be in the sixth year of loan?

Accepted Answer

A) $1,123.39 
B) $1,241.89 
C) $1,259.94 
D) $1,403.71 
A) $1,123.39 
B) $1,241.89 
C) $1,259.94 
D) $1,403.71

Question 14

PLAMs have been very popular with lenders.

Accepted Answer

A) True 
 B)False

Question 15

A borrower with an interest-only loan may end up owing more at the end of the loan than the original loan amount.

Accepted Answer

A) True 
 B)False

Question 16

An ARM may also be referred to as a floating payment loan.

Accepted Answer

A) True 
 B)False

Question 17

If an ARM index increased 15%,the negative amortization on a loan with a 5% annual payment cap is calculated by:

Accepted Answer

A) Using the same payment as last year and deducting 5% from the principal balance 
B) Increasing the payment by 5% 
C) Totaling the difference between the payments with the 5% capped payment 
D) Compounding the difference between the payments as if no cap existed and with the 5% capped payment 
A) Using the same payment as last year and deducting 5% from the principal balance 
B) Increasing the payment by 5% 
C) Totaling the difference between the payments with the 5% capped payment 
D) Compounding the difference between the payments as if no cap existed and with the 5% capped payment

Question 18

If one of the terms of an ARM read,interest is capped at 2%/5%,what would that mean?

Accepted Answer

A) The borrower can choose the cap he wants by simply circling the appropriate choice 
B) The interest rate has a 2% annual cap rate and a 5% lifetime cap rate 
C) The interest rate has a 5% annual cap rate and a 2% lifetime cap rate 
D) The interest rate has a 2% annual cap rate and a 5% floor cap rate 
A) The borrower can choose the cap he wants by simply circling the appropriate choice 
B) The interest rate has a 2% annual cap rate and a 5% lifetime cap rate 
C) The interest rate has a 5% annual cap rate and a 2% lifetime cap rate 
D) The interest rate has a 2% annual cap rate and a 5% floor cap rate

Question 19

ARMs eliminate all the lender's interest rate risk.

Accepted Answer

A) True 
 B)False

Question 20

The expected cost of borrowing depends on which of the following provisions?

Accepted Answer

A) The frequency of payment adjustments 
B) The inclusions of caps and floors on the interest rate,payment or loan balances 
C) The spread over the index chosen for a given ARM 
D) All of the above 
A) The frequency of payment adjustments 
B) The inclusions of caps and floors on the interest rate,payment or loan balances 
C) The spread over the index chosen for a given ARM 
D) All of the above

Exam 5: Adjustable and Floating Rate Mortgage Loans

A major benefit of a PLAM is the mortgage payment increases closely follows borrower salary increases.

The floor of an ARM is the maximum reduction of payments or interest rates allowed.

Under which scenario is negative amortization likely to occur?

ARMs were developed because lenders were tired of offering a limited selection of loan alternatives to borrowers.

In order to calculate the APR for an ARM,you must,

Which is NOT a component of an ARM?

Which loan in the above table is a FRM?

Lender's can partially avoid estimating interest rates by tying an ARM to an interest rate index.

Which of the following is a disadvantage of PLAMs?

Given that every other factor is equal,which of the following ARMs will have the lowest expected cost?

A borrower takes out a 30-year adjustable rate mortgage loan for $200,000 with monthly payments.The first two years of the loan have a "teaser" rate of 4%,after that,the rate can reset with a 2% annual rate cap.On the reset date,the composite rate is 5%.What would the Year 3 monthly payment be?

A borrower takes a 30-year,fully amortizing,5/1 ARM for $225,000 with an initial interest rate of 4.375%.Assuming the index on which the loan rate is based rises by 1% in the fourth year of the loan and remains at that level,what will the payment be in the sixth year of loan?

PLAMs have been very popular with lenders.

A borrower with an interest-only loan may end up owing more at the end of the loan than the original loan amount.

An ARM may also be referred to as a floating payment loan.

If an ARM index increased 15%,the negative amortization on a loan with a 5% annual payment cap is calculated by:

If one of the terms of an ARM read,interest is capped at 2%/5%,what would that mean?

ARMs eliminate all the lender's interest rate risk.

The expected cost of borrowing depends on which of the following provisions?

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Real Estate Financing: Notes and Mortgages

Mortgage Loan Foundations: The Time Value of Money

Fixed Interest Rate Mortgage Loans

Mortgages: Additional Concepts, analysis, and Applications

Single-Family Housing: Pricing, investment, and Tax Considerations

Underwriting and Financing Residential Properties

Income-Producing Properties: Leases, rents, and the Market for Space

Valuation of Income Properties: Appraisal and the Market for Capital

Investment Analysis and Taxation of Income Properties

Financial Leverage and Financing Alternatives

Risk Analysis

Disposition and Renovation of Income Properties

Financing Corporate Real Estate

Financing Project Development

Financing Land Development Projects

Structuring Real Estate Investments: Organizational Forms and Joint Ventures

The Secondary Mortgage Market: Pass-Through Securities

The Secondary Mortgage Market: Cmos and Derivative Securities

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Real Estate Investment Performance and Portfolio Considerations

Real Estate Investment Funds: Structure, performance, benchmarking, and Attribution Analysis

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