Deck 20: Mortgages and Security Interests

Question 1

When a borrower does not qualify for a conventional mortgage, he might ask for and receive a subprime loan.

Answer 1

True
Explanation: Generally, these borrowers have been disqualified from conventional loans because of a bad credit history or because of a low debt-to-income ratio. These loans generally have a much higher default rate than most of the conventional loans and are, thus, disfavored by lenders.

Question 2

The funds of the Troubled Asset Relief Program (TARP) are managed and allocated by the President of the United States.

Answer 2

False
Explanation: The TARP program was designed to allow the government to buy many of the so-called troubled assets that had resulted from the securitization epidemic. TARP was initially funded with over $700 billion and is managed by the Secretary of the Treasury.

Question 3

Fred Farmer, the mortgagor, is entitled to a jury trial when Big Bank attempts foreclosure on his farm.

Answer 3

False
Explanation: In a majority of jurisdictions, a mortgage is a lien on the land, thus a foreclosure is an equitable action on the land. The mortgagor (Fred Farmer) does not have a right to a jury trial in a foreclosure action.

Question 4

A furniture store that puts up its inventory as collateral for a loan will grant the lender a floating lien.

Question 5

Daisy attempts to put up Harry's property for a loan without Harry's knowledge or consent. Daisy has attached, but not perfected, Harry's property.

Question 6

If Enrico purchases a house subject to a mortgage, Enrico agrees to continue paying the debt.

Question 7

The Emergency Economic Stabilization Act (ESSA) of 2008 did not have the authority to limit executive compensation and the "golden parachutes" of CEOs of institutions who were granted TARP bailout funds.

Question 8

A security interest is automatically perfected when the secured party has a legally enforceable right to take the property and sell it to satisfy the debt.

Question 9

After repossessing the goods, the secured party (the creditor) may sell them at a public auction or private sale.

Question 10

If a mortgage is not recorded and a later mortgage is given on the same property, the new mortgage is superior to the first.

Question 11

A security agreement can either be oral or in writing.

Question 12

By taking a graduated-payment mortgage, Jake will pay a fixed interest rate and make increased monthly payments over the term of the loan.

Question 13

A reverse mortgage is a type of loan that allows older homeowners to convert some of the equity in their home into cash, while retaining ownership of their home.

Question 14

The mortgagee has the unrestricted right to sell, assign, or transfer the mortgage to a third party.

Question 15

A deed of trust is requires court action to sell property upon default of the debtor.

Question 16

A conventional fixed-rate mortgage involves no government backing by either insurance or guarantee.

Question 17

Linda puts up her land as collateral for a loan from Small Bank. Linda is a mortgagee.

Question 18

A mortgagee has the right to equity of redemption.

Question 19

Furniture loans, home improvement loans, student loans, and construction loans are examples of mortgage-backed securities.

Question 20

Only personal property can be used to secure a debt.

Question 21

Iris is looking for a short-term mortgage that will allow her to pay fixed payments at a relatively low fixed interest rate during the life of the mortgage and one large payment at the end of the term. What kind of mortgage should Iris take?

A) A balloon-payment mortgage
B) A VA mortgage
C) A conventional mortgage
D) A graduated-payment mortgage

Question 22

A(n) ____________ is a transfer of an interest in real property for the purpose of creating a security for a debt.

A) mortgage
B) secured loan
C) security interest
D) unsecured loan

Question 23

If the mortgagor has defaulted or has failed to perform some other agreement in the mortgage, the mortgagee has the right to apply to a court to have the property sold. This is called the right to:

A) acceleration.
B) foreclosure.
C) perfection.
D) attachment.

Question 24

Carol borrows $50,000 to purchase seven industrial Xerox copying machines, and open up her own copy shop. The bank loan requires that Carol grant the bank a security interest in any property acquired after the original agreement is signed. After she shows the loan letter to Xerox, it agrees to sell her the copiers for $80,000 to be paid over five years. Who has priority in the copying machines?

A) The bank, if it filed and perfected its interest first
B) The bank because of the "floating lien" loan agreement
C) Xerox, if it filed the loan agreement before the bank did
D) Xerox, because this is a purchase money security interest

Question 25

Generally, a security interest is perfected when the:

A) secured party has done everything that the law requires to give the secured party greater rights to the goods than others have.
B) secured party has a legally enforceable right to take that property and sell it to satisfy the debt.
C) buyer takes the property subject to a mortgage and the seller agrees to continue paying the debt.
D) goods are sold, but regained as soon as the debtor takes possession of the new property.

Question 26

A(n) ____________ agreement is a written contract which identifies the secured goods and is signed by the debtor.

A) subordination
B) security
C) consumer loan
D) equitable redemption

Question 27

The right to equity of redemption:

A) is the mortgagor's (debtor's) right to pay off the mortgage in full, including interest, and thus, discharge the debt in total.
B) states that a default on one installment payment will make the entire balance due immediately, giving the mortgagee the right to collect the full amount.
C) is the mortgagee's right to apply to a court to have the property sold.
D) gives the mortgagor the right to receive each installment payment as it falls due.

Question 28

A point is a one-time charge equal to ____________ of the principal amount borrowed.

A) one-tenth
B) three percent
C) one percent
D) ten percent

Question 29

In which type of mortgage is the loan repaid when the borrower dies or the property is sold?

A) Variable-rate mortgage
B) Conventional mortgage
C) Balloon-payment mortgage
D) Reverse mortgage

Question 30

A(n) ____________ provision in the security agreement allows the security interest of the creditor to also apply to goods the debtor acquires at a later time.

A) forbearance
B) attachment
C) floating lien
D) acceleration

Question 31

Which of the following is true of conventional fixed-rate mortgages?

A) It has a rate of interest that changes according to fluctuations in the index to which it is tied.
B) It involves no government backing by either insurance or guarantee.
C) It has a fixed interest rate during the life of the mortgage, where the monthly payments by mortgagor increase over the term of the loan.
D) It has comparatively low fixed payments during the life of the mortgage, followed by one large final payment.

Question 32

Which of the following is true of recording a mortgage?

A) A failure to record the first mortgage would remove the obligation of the mortgagor to the first mortgagee.
B) The second mortgagee must know about the first mortgage and is exempted to record the mortgage.
C) If the mortgage is not recorded and a later mortgage is given on the same property, the old mortgage is superior to the second.
D) Recording a mortgage notifies any third party that the mortgagee has an interest in the real property covered by the mortgage.

Question 33

Under a ____________, the mortgagor conveys his or her interest in the property to a disinterested third party, known as a trustee.

A) security agreement
B) mortgage
C) deed of trust
D) subordination agreement

Question 34

The process of ____________ occurs when many mortgages are bundled together and sold as bonds to institutions, such as pension funds.

A) perfection
B) foreclosure
C) acceleration
D) securitization

Question 35

According to the UCC, conflicting secured interests are generally resolved:

A) according to whether an attached security interest in inventory has priority over a conflicting security interest in the same inventory.
B) by consumers' perfected security interests of which they have no knowledge.
C) based on whether the seller's inventory prevails over buyers of goods in the ordinary course of business (except farm products).
D) according to priority in time of filing or perfection.

Question 36

An acceleration of the debt:

A) increases the interest rate.
B) makes the entire amount of the debt due for immediate payment.
C) increases the monthly payment amount.
D) makes the repayment period of the entire debt one year.

Question 37

Charles sold a house to Darla with Charles holding a recorded mortgage. Darla wants to sell the house and her purchaser, Cindi, obtains a financing commitment from Small Bank, provided Small Bank is able to hold a first mortgage on the house. How will Small Bank obtain the first mortgage?

A) By paying off Darla's mortgage.
B) Small Bank mortgages take priority over private mortgages.
C) Charles may give oral consent that Small Bank will have priority.
D) By paying off Charles' mortgage.

Question 38

A ____________ loan is that which deliberately misstates the qualifications of a borrower to push a loan through the approval process.

A) NINJA
B) liar
C) subprime
D) home equity

Question 39

A(n) ____________ occurs when the ____________.

A) attachment; secured party does not sign a security agreement
B) securitization; debtor has no ownership rights in the collateral
C) attachment; secured party transfers something of value to the debtor
D) floating lien; secured party gives possession of the collateral

Question 40

A(n) ____________ loan is one in which creditors have something of value, usually called ____________, which they can ____________ if the debtor ____________.

A) priority; collateral; sell; defaults
B) unsecured; collateral; sell; dies
C) unsecured; collateral; possess; defaults
D) secured; collateral; possess; defaults

Question 41

Morey purchased a house for $150,000, paying $15,000 in cash and giving a mortgage to BigBank for the balance. When Morey defaulted on the loan, BigBank foreclosed and sold the house for $25,000 less than Morey owed. Morey believed he no longer owed BigBank any money. Discuss the case.

Question 42

Hayley loans David $20,000 by taking a mortgage on David's land on February 1^st, but does not record a mortgage. On April 1, Gavin loans David $15,000 taking a mortgage on the same land and records the mortgage on April 4^th. Hayley then records her mortgage on April 8. Discuss the proceedings in case David is unable to pay either of the lenders.

Question 43

Suri purchased a new laptop for $2,500 from Gadget World. To pay for it, she borrowed money from ATS Finance, which took a security interest in the laptop by entering into a security agreement with Suri. How will the security interest be perfected in this case?

Question 44

Iko purchased a house through Stockholm Bank Pvt., Ltd. A year later, Iko wanted to make improvements on the mortgaged property and borrowed money from Jeremy, mortgaging the same property again. Jeremy is unaware of the mortgage of the house by Stockholm Bank and records the mortgage. Analyze the situation in case Iko is unable to repay both the mortgagees.

Question 45

Holly bought a house for $200,000. She put down $40,000 in cash, and took out a $160,000 loan from the Midland Bank to cover the rest of the cost. However, Holly found that she could not make her mortgage payments. Midland Bank foreclosed on the mortgage, sold the house for $150,000, and told Holly that she was liable for the $10,000 difference between what she paid for it and what the bank sold it for. Did Midland act within its rights? Explain.

Question 46

Brianna is purchasing an apartment building from Austin that already has a $500,000 mortgage on it. Brianna is uncertain if she can make money on this purchase and certainly does not want the responsibility of paying the mortgage. Discuss how Brianna might structure this purchase to avoid responsibility for the preexisting mortgage.

Question 47

Rae's mortgage payment check is received a day late by Big Bank. Big Bank refuses the check and accelerates the mortgage debt. Rae is unable to pay this demand, and Big Bank brings action to foreclose the mortgage. Discuss what defenses, if any, Rae has to the foreclosure action.

Question 48

Daly and Leva entered into an agreement whereby Leva borrowed $15,000 from Daly, and Daly took a security interest in Leva's next corn harvest. The financing statement identified Daly and Leva by name and included their mailing addresses. Leva signed the statement. Can the security interest, in this case, be perfected by the financing statement filed?

Question 49

The Raymonds financed the purchase of their house through Reed Bank, a local bank with branches in Houston, where the Raymonds lived. The family made their mortgage payments punctually each month at the nearby branch. However, without prior warning, Reed Bank assigned the mortgage to Stanley Savings Bank located in Washington. Discuss the rights of Reed Bank in making this assignment and if the Raymonds can avoid the inconvenience of dealing with Stanley Savings Bank.

Question 50

Friendly Furniture Co. wants to repossess a sofa in Ed's living room, but Ed refuses to allow the repossession crew into his house. Discuss what options Friendly has.