Chapter 37 — Self-Check Quiz

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Chapter 37 — Self-Check Quiz

Twenty-six questions: multiple choice and short answer, written in the style of the SAFE MLO test where the material is exam-relevant. Answer key in the collapsed block at the bottom. Work the arithmetic before you look.

Multiple choice

1. A new loan pays off the borrower's existing first mortgage and the closing costs of the new transaction, and returns \$400 to the borrower at the table. Under agency terminology this is most likely:

A. a cash-out refinance
B. a limited cash-out (rate-and-term) refinance
C. a streamline refinance
D. ineligible, because any cash back reclassifies the transaction

2. Which of the following transactions carries a right of rescission under Regulation Z?

A. A purchase-money first mortgage on the borrower's primary residence
B. A cash-out refinance on the borrower's rental duplex
C. A rate-and-term refinance with a new lender secured by the borrower's principal dwelling
D. A purchase-money first mortgage on a vacation home

3. A borrower refinances a thirty-year loan on which 276 payments remain into a new thirty-year loan at a lower rate. Which statement is necessarily true?

A. The borrower's total interest over the life of the debt will be lower
B. The borrower will make 84 more mortgage payments than they otherwise would have
C. The borrower's monthly principal reduction will be lower
D. The borrower's break-even is the closing costs divided by the payment reduction

4. The formula "closing costs ÷ monthly payment reduction" understates the true break-even because it:

A. treats a payment reduction as if it were entirely a saving
B. ignores the reset of the amortization schedule
C. misprices closing costs that are financed rather than paid
D. all of the above

5. Under the Homeowners Protection Act, "original value" for a refinance transaction is:

A. the price the borrower originally paid for the property
B. the appraised value relied upon at consummation of the refinance
C. the lesser of the original purchase price or the current appraised value
D. 80% of the current appraised value

6. A streamline refinance program can waive appraisal and income documentation principally because:

A. the borrower has already been underwritten once
B. the investor already carries the risk on the existing loan and is not increasing exposure
C. streamline loans are smaller on average
D. the program is guaranteed by the federal government

7. Refinance application volume tends to fall as a step rather than a slope when rates rise because:

A. lenders raise credit standards during rate increases
B. the population of in-the-money loans is exhaustible and was just rewritten at lower rates
C. appraisers become backlogged
D. investors stop buying refinance loans

8. A borrower finances \$6,000 of closing costs into a thirty-year loan at 6.000%. The additional monthly payment is approximately \$36. Over the full term, the borrower will pay for those closing costs approximately:

A. once
B. 1.4 times
C. 2.2 times
D. 3.5 times

9. Which of the following is the most defensible net tangible benefit statement?

A. "Borrower's monthly payment is reduced by \$284."
B. "Borrower qualifies for a lower rate."
C. "Total cost of credit over the borrower's stated four-year horizon falls by \$8,400 net of all closing costs; term is not extended; mortgage insurance obligation is unchanged."
D. "Refinance provides borrower with improved cash flow and access to equity."

10. A loan pays off a first mortgage and a home equity line of credit that was opened three years after the purchase. The borrower receives no cash. The transaction is generally treated as:

A. rate-and-term, because no cash is disbursed
B. cash-out, because the second lien was not purchase-money
C. a streamline, because both liens are being consolidated
D. ineligible for conventional financing

11. Compared with a rate-and-term refinance, a conventional cash-out refinance on a one-unit primary residence generally has:

A. a higher maximum LTV and better pricing
B. a lower maximum LTV and worse pricing
C. the same LTV limit but reduced documentation
D. the same pricing but a longer rescission period

12. A borrower six years into a thirty-year loan refinances into a new thirty-year loan at a rate 150 basis points lower. Their monthly principal reduction:

A. always falls, because the amortization schedule resets
B. always rises, because the rate is lower
C. may rise or fall; it depends on the size of the rate improvement
D. is unchanged, because the balance is unchanged

13. The single most important input to a refinance decision that cannot be obtained from any document is:

A. the current note rate
B. the outstanding balance
C. the borrower's expected holding period
D. the mortgage insurance factor

14. In the Linden Street refinance, financing the full \$5,994.67 of closing costs produces a loan of \$367,061.17 against a \$385,000 value. The problem with that is:

A. the loan exceeds the conforming limit
B. the loan-to-value is 95.34%, which crosses the 95% line into a worse mortgage insurance band and worse pricing
C. financed costs are not permitted on a rate-and-term refinance
D. the borrower would have negative equity

15. Purchase origination differs structurally from refinance origination primarily because a purchase loan:

A. requires an appraisal
B. arrives attached to a contract with an externally imposed closing date and third parties
C. is always larger
D. is subject to TRID while refinances are not

16. An originator whose entire pipeline comes from company-purchased leads is most exposed to which risk when rates rise?

A. lock extension costs
B. appraisal shortfalls
C. having no top of funnel at all when the lead spend stops
D. rising loan-level price adjustments

17. Serial refinancing harms borrowers through all of the following mechanisms EXCEPT:

A. compounding of repeatedly financed closing costs
B. repeated resets of the amortization schedule
C. repeated resets of the mortgage insurance termination schedule
D. automatic increases in the borrower's property tax assessment

18. The "lock-in effect" following a sharp rise in mortgage rates refers to:

A. rate locks that expire before closing
B. the reluctance of households holding low-rate mortgages to sell, which constrains inventory
C. lenders locking pipelines in bulk to hedge
D. the prohibition on refinancing within six months of closing

19. A refinance analysis holds all four terms at the same note rate — 30, 25, and 20 years plus a term-matched option. Relative to real-world pricing, this treatment is:

A. aggressive, because shorter terms price higher
B. conservative, because shorter terms typically price lower than the thirty-year
C. neutral, because term does not affect pricing
D. invalid, because the comparison must use a single term

20. On a conventional cash-out refinance benchmarked at 80% loan-to-value, a borrower with a \$385,000 value and a \$361,066.50 balance can take out approximately:

A. \$46,933
B. \$25,000
C. \$8,000
D. nothing — the existing balance already exceeds the cash-out limit

Short answer

21. State the net position test in one sentence, and name the two quantities that are summed under each choice.

22. A borrower's payment falls \$310 a month and their monthly principal reduction falls \$118. How much of the \$310 is a saving? What is the other \$118?

23. A borrower is at payment 128 of a schedule whose mortgage insurance terminates at payment 137, paying \$164 a month. A refinance would restart mortgage insurance for an estimated 110 payments at \$159. Compute both totals and state the cost of the reset.

24. Explain, in two sentences a real estate agent would understand, why a loan officer who has done only refinances for three years may miss purchase contract deadlines.

25. Name the three legitimate benefits of a refinance from §37.4, and give one example of a transaction where a higher total cost is still the right recommendation.

26. A refinance worksheet shows: costs \$5,200, payment reduction \$260, break-even 20.0 months. Name the three additional figures you would demand before this worksheet is shown to a borrower, and say what each one is for.

Answer key — work the questions first

**1. B.** A limited cash-out (rate-and-term) refinance. The agencies permit a small amount of incidental cash back precisely so that a rounding difference in the payoff does not reclassify the transaction. Verify the current cap in the applicable Selling Guide — it is exactly the kind of figure that gets revised. **D** is the classic trap: some cash back is fine; the question is how much and why. **2. C.** The right of rescission attaches to a refinance of the borrower's **principal dwelling** with a lender other than the current holder. Purchase-money loans (A, D) carry no rescission right, and B fails because an investment property is not the borrower's principal dwelling. Chapter 23 has the mechanics. **3. B.** 360 − 276 = 84 additional payments. **A** is not necessarily true — §37.5 shows a full point of rate improvement producing \$38,319.12 of *additional* total cost when the term resets. **C** is not necessarily true either; a large enough rate improvement can raise the principal share even from a reset schedule, which is exactly what happens on the Linden Street file. **D** is the error the whole chapter is about. **4. D.** All three, and they compound, and all three point in the same direction — toward making the refinance look better than it is. **5. B.** For a refinance there is no sales price, so "original value" is the appraised value relied upon at consummation of the refinance. This is why the new appraisal is not a formality: it sets the mortgage insurance termination schedule for the next decade. **6. B.** The investor already holds the risk on the existing loan and the refinance does not increase its exposure. That is also precisely why the benefit test is mandatory: a product that does not re-underwrite the risk can be sold to a borrower who should not have it. **7. B.** The pool of in-the-money loans is exhaustible. Everyone who was going to refinance already did, at a rate below today's, so a rate rise does not shrink demand proportionally — it eliminates it. Secondary-market analysts call the emptying of the pool *burnout*. **8. C.** About 2.2 times. \$36 × 360 = \$12,960 against \$6,000 of costs — a multiple of about 2.16. The interest alone exceeds the costs. **9. C.** It is the only one a stranger reading the file in three years could evaluate: it states a horizon, nets the costs, addresses the term, and addresses mortgage insurance. **A** is a payment comparison. **D** is a sentence that means nothing and would not survive an examiner. **10. B.** Cash-out is defined by what the proceeds retire, not by whether a check is written. A non-purchase-money second is generally cash-out; a purchase-money second taken at the time of purchase is generally not. Both rules carry conditions and both get revised — verify. **11. B.** Lower maximum LTV and worse pricing, plus its own loan-level price adjustment and often seasoning requirements. Chapter 35 covers occupancy and product; Chapter 29 covers what the adjustment does to the rate. **12. C.** It depends on the size of the improvement. In §37.5's file (a one-point drop, six years in) principal reduction falls from \$373.81 to \$282.80. In §37.10's file (150 basis points, fourteen months in) it rises from \$348.55 to \$423.91. The reset is not automatically fatal — it is automatically uncounted. **13. C.** The borrower's expected holding period. You cannot look it up and you must not substitute a statistic for it. Ask the household in front of you and write the answer in the file. **14. B.** 95.34%, over the 95% line. Ninety-five percent of \$385,000 is exactly \$365,750.00 — finance \$4,683.50 of the costs and bring \$1,311.17 to land precisely on the line. **15. B.** The contract, the deadline, and the third parties. Nearly every other difference between the two businesses follows from that one. **D** is false — TRID applies to both. **16. C.** No top of funnel. The lead spend belongs to the company, not to the originator, and the day it stops the funnel does not shrink — it has no top. **17. D.** Property tax assessment is not a mechanism of refinance harm. A, B, and C are three of the four cylinders described in §37.7; the fourth is the loss of equity itself. **18. B.** Households holding mortgages at rates far below the market become unwilling to sell, which constrains the supply of existing homes and therefore constrains purchase volume too. The rate cycle shrank both businesses, in different ways and on different timetables. **19. B.** Conservative. Fifteen- and twenty-year products typically price below the thirty-year, so holding all terms at the same rate understates how good the shorter terms look. **20. D.** Nothing. Eighty percent of \$385,000 is \$308,000, and the existing balance of \$361,066.50 already exceeds it by more than \$53,000. There is no cash-out capacity on this file at this value. The correct answer to the borrower is a definite no, followed by what they should look at instead. **21.** For a chosen horizon, sum (i) every dollar paid out — principal, interest, mortgage insurance, and any closing costs paid at the table — plus (ii) the loan balance still owed at the end of that horizon. Lower total wins. It differs from the payment formula in that it compares two complete positions at a date rather than one cost against one cash flow. **22.** \$192 is the saving. The other \$118 is money the borrower is no longer paying toward their own principal — a transfer from their balance sheet to their checking account, and one they are paying interest to make. **23.** Keep: 137 − 128 = 9 payments × \$164 = **\$1,476**. Refinance: 110 × \$159 = **\$17,490**. The reset costs **\$16,014** — a figure that appears nowhere on a payment comparison and that by itself would exceed every closing cost in most refinance transactions. This borrower is nine months from never paying mortgage insurance again and should almost certainly be told so. **24.** A refinance has no deadline except the rate lock, which the loan officer creates and can extend; a purchase has a contract with dates that other people's moving trucks are scheduled around, and missing one can put earnest money at risk. Three years of files where nothing happened on the day they did not close is three years of training in exactly the wrong reflex. **25.** (i) Lower total cost over the borrower's horizon, net of all costs, with the term held or shortened; (ii) a materially safer structure; (iii) a use of equity with no cheaper source. The higher-total-cost case that is still correct: converting an adjustable-rate loan to a fixed rate before it adjusts. The borrower is buying the removal of a risk, and you should say so explicitly rather than pretending it is a saving. **26.** (i) The **remaining term** on the existing loan versus the proposed term — to detect a term extension. (ii) Whether the \$5,200 is **paid or financed**, and the payment on the same loan without it — to price the financed costs. (iii) The borrower's **stated horizon** — because without it, no break-even in months means anything. A fourth, if mortgage insurance is present on either loan: the remaining and proposed mortgage insurance schedules.