Chapter 1 — Exercises

Thirty-two problems, graduated. Items marked † have worked solutions in Appendix: Answers to Selected Exercises. No answers appear in this file — work them before you look.

Assume, throughout, the Linden Street facts established in Chapter 1: a \$385,000 purchase, a \$365,750 loan at 6.625% for 360 months, a monthly principal-and-interest payment of \$2,341.94.

A. Recall and definitions

1.1 Name the two documents that together constitute what people call "a mortgage," and state in one sentence what each does.

1.2 † Which of the two is recorded in the county land records, and why is the other one not?

1.3 Define lien without using the word "claim."

1.4 In a deed of trust, name all three parties and state what each holds.

1.5 † A borrower asks: "Is a mortgage the same thing as a deed of trust?" Answer in three sentences, at a level a first-time buyer can use.

1.6 Distinguish mortgagor from mortgagee. Give yourself a memory device you would actually use under exam pressure.

1.7 What is the difference between the primary market and the secondary market?

1.8 † List the five roles that touch a residential loan file, and mark which ones ever speak directly to the borrower.

1.9 What is a warehouse line of credit, and which of the three business models requires one?

1.10 State the S.A.F.E. Act's functional description of a mortgage loan originator. Why does the phrase "for compensation or gain" appear in it?

B. Applied reasoning

1.11 † Your borrower calls in March, four months after closing, saying they received a letter directing them to send their payment to a company they have never heard of. Write the reply you would actually send — under 120 words, no jargon — explaining what happened and what they should verify before sending money anywhere.

1.12 A colleague tells a borrower, "Don't worry, Fannie Mae already approved you." Identify everything wrong with that sentence and write a corrected version.

1.13 Explain, to a real estate agent who has asked why underwriting is "so slow," what the underwriter is actually certifying and to whom.

1.14 † A file is originated by a mortgage broker and funded by a wholesale lender. Answer three questions: whose money crosses the closing table, whose name appears on the note, and who the borrower will call in six months with a question about their escrow account.

1.15 Your employer is a federally chartered bank. Your friend originates for a non-bank lender across town. Describe two concrete differences in your professional situations that follow from that single fact. (Chapter 3 covers this fully; answer from §1.6.)

1.16 A borrower says: "I'd rather my loan not be sold. Can I request that?" Answer honestly, including what a borrower can and cannot control here.

1.17 † The chapter claims the lender "is not primarily in the interest business." Restate that claim in your own words and give the one fact that best supports it.

C. Qualify this borrower

1.18 † Using only the payment shown in Chapter 1, compute the first month's interest on the Linden Street loan. Then compute how much of that first payment goes to principal. Show the arithmetic.

1.19 The borrowers' total monthly obligation including taxes, insurance, and mortgage insurance is \$3,033.72. Their gross monthly income is \$10,500.00. Express the housing ratio as a percentage to two decimals, and then state it in a sentence a borrower would understand.

1.20 † The same borrowers have \$1,446.00 in other monthly debts. Compute the total debt-to-income ratio. Then answer: which of the two ratios would you lead with on a phone call, and why?

1.21 A competitor advertises 6.375%. Compute the monthly principal-and-interest payment difference against 6.625% on \$365,750, and then compute the five-year difference. (You may use the figures given in the chapter.)

1.22 † The earnest money on this transaction is \$5,000 and the appraisal fee is \$650. If the transaction collapses on day 45 after the financing contingency has expired, quantify the borrower's maximum documented out-of-pocket loss from those two items alone — and then list two costs that cannot be quantified.

D. Structure the deal

1.23 Before you can quote a rate, the chapter says you need four facts. Name them, and for each, say in one line why a pricing engine needs it.

1.24 † A caller gives you only two of the four. Write the exact sentence you would say to quote responsibly without either refusing to answer or inventing a number.

1.25 Rank the following by how much each changes what you can promise a borrower on a first call, and defend your ranking: representative credit score; loan-to-value; the borrower's stated income; whether they have a signed purchase contract.

E. Read the document

1.26 † Reread Figure 1.1. The note names a payment of \$2,341.94, but the borrowers will pay \$3,033.72. Explain the difference to a borrower in two sentences, and name the document that does show the larger figure.

1.27 Figure 1.1's "WHAT IT DOESN'T" field lists several things the note omits. Choose the omission you think is most dangerous for a borrower who does not understand it, and explain why.

1.28 A closing package arrives and the note shows a rate of 6.750% while the Closing Disclosure the borrowers received three days ago shows 6.625%. State exactly what you do, in order, and what you do not do.

F. Write it

1.29 † Write the pre-approval-letter email you would send the buyer's agent at 8:45 a.m. on day 0 — before you have spoken to the borrowers. It must commit to a time, name what you need, and promise nothing you cannot support. Under 100 words.

1.30 A borrower has asked, in writing, "Who actually owns my loan?" Draft a reply that is accurate on day 51 (closing day) and remains accurate a year later.

G. Judgment

1.31 The agent who referred this file asks you to issue a pre-approval letter for \$420,000 — higher than you believe is supportable — because "it makes the offer look stronger and they'll never actually go that high." Write what you say. Then write what you do if she pushes back.

1.32 † The Loan File extension. In your Appendix C workbook, complete the day-0 party table from the chapter's checkpoint. Then write one paragraph answering the question the checkpoint poses: if this loan closes, who will own the debt in a year and who will the borrowers pay? Mark every element of your answer as either supported (you can point to a fact) or assumed. You should end up with very little in the first column. That is the correct result.