REE Exam 2 (CORRECT ONE)

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:

the loan always goes to maturity.

A contract for sale of the property with the special provision that the actual delivery of a deed conveying ownership will occur well after the buyer takes possession of the property is more commonly referred to as:

contract for deed.

A conventional mortgage loan is one that is not insured or guaranteed by an agency of the U.S. government. The lender, however, can still pursue a private mortgage insurance (PMI) policy to provide a guarantee for the fulfillment of the borrower’s obligations. Typically, PMI is required for all loans that have a loan to value (LTV) ratio greater than:

80%.

A special contract in which the borrower pledges the mortgaged property as security to the lender is commonly referred to as the:

mortgage (Deed of Trust).

Adjustments for physical characteristics are intended to capture the dimensions in which a comparable property differs physically from the subject property. If the only physical difference between the subject property and the comparable is that the comparable does not have a fireplace, which of the following adjustments should take place?

The transaction price of the comparable property should be adjusted upward.

Appraisers rely on recently completed transactions of similar properties to guide their selection of the cap rate to be used to value a single property. The method of estimating a cap rate from a series of comparable properties is more commonly referred to as:

direct market extraction.

Are students guaranteed to do well on the actual exam if the student scores well on this practice exam?

No, but students are very likely to do well on the actual exam if they take the practice exam multiple times, without using their notes or other assistance, and do well on the practice exam several times in a row. (this is the correct answer)

Assume that a borrower's property is reporting negative cash flows and cannot pay the mortgage. The bank notifies the borrower they must pay the loan in full. The mortgage clause that makes this possible is known as the:

demand clause.

At the conclusion of the traditional sales comparison approach to valuation, the appraiser evaluates and reconciles the final adjusted sale prices into a single value for the subject property. This single value is commonly referred to as:

indicated value.

Based on your understanding of the relation between the several types of bankruptcy and the foreclosure process, which of the following types of bankruptcy strategies would you expect to be least harmful to a lender’s mortgage interest?

Chapter 7 bankruptcy

Based on your understanding of the sales comparison approach, which of the following sequences of steps best identifies the appropriate implementation of the sales comparison approach from start to finish?

Identify elements of comparison and value adjustment; select comparable sales; adjust comparable sale prices to approximate subject; reconcile adjusted sale process to obtain indicated value of the subject

Based on your understanding of the three types of accrued depreciation, which of the following refers to the loss in market value due to deterioration of the subject property’s neighborhood?

external obsolescence

Based on your understanding of the three types of accrued depreciation, which of the following refers to the loss in value of a building over time associated with the aging and decay of the building’s physical condition?

physical deterioration

Because the mortgage conveys a complex claim for an extended period of time, clauses are included in anticipation of possible future complications. Which of the following clauses requires a borrower/mortgagor to maintain property casualty (hazard) insurance covering fire, windstorm, etc. and gives the lender joint control in the use of proceeds in case of major damage to the property?

insurance clause

Because the mortgage conveys a complex claim for an extended 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 to pay obligations such as property taxes, community association fees, or causality insurance premiums?

escrow clause

Because the property is being pledged by the action of the borrower in a mortgage loan contract, the borrower is also referred to as the _____________ of the mortgage claim.

mortgagor

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?

conventional home loan

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)?

Truth-in-Lending Act (TILA)

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?

conventional home loan

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 commonly referred to as:

conforming conventional loans.

Discounted cash flow (DCF) valuation models differ from direct capitalization models in several important ways. When discounting future expected cash flows in the DCF methodology, which of the following rates should be used to determine the present value of the forecasted cash flow stream?

required internal rate of return

Estimating the market value of real estate is complicated by the unique characteristics of real estate markets. In contrast to stock markets, real estate markets are characterized by all of the following EXCEPT:

market prices are revealed almost instantaneously to prospective buyers.

Even after a property goes into foreclosure, it is still possible for the borrower to reclaim the property as long as they produce the outstanding mortgage balance and all foreclosure costs incurred to that point. In a state such as Georgia, this right only extends to the date of the foreclosure sale. When this occurs, this right is more commonly referred to as:

equity of redemption.

Favorable mortgage financing may have a significant impact on the transaction price of the particular property. If the comparable property was known to have had favorable financing terms negotiated into the transaction price, which of the following adjustments should take place? (Note: Assume that the comparable property cannot be dropped from the analysis as there are already limited comparable sales transactions.)

The transaction price of the comparable property should be adjusted downward.

Federal Housing Administration (FHA) loans are typically considered _____________, which means that the buyer can preserve the existing loan by signing the note as long as the buyer continues to qualify for the loan.

assumable loans

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:

FHA loans require higher credit scores than are needed for prime conventional loans.

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?

defeasance prepayment penalty

For smaller income-producing properties, appraisers may use the ratio of a property’s selling price to its effective gross income; called an EMX. This is an example of a:

gross income multiplier.

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 the following statements regarding foreclosure are true EXCEPT:

When a lender forecloses on a property, it extinguishes all superior liens, bringing about a free and clear sale of the property.

Gross income multiplier analysis assumes that the subject and comparable properties are collecting market rents. Therefore, it is frequently argued that an income multiplier approach to valuation is most appropriate for properties with short-term leases. Which of the following property types, therefore, would we find it most appealing to use a gross-income multiplier in our analysis?

apartments

Home equity credit lines commonly offered by banks, have historically relied on which of the following index rates as the “moving part” in the adjustable rate offered to borrowers?

commercial bank “prime rate”

If a homeowner in mortgage distress owes more than the value of the home and is unable to make the loan manageable by refinancing or modifying the mortgage, the next recourse often is a short sale of the property. All the following statements are true regarding a short sale EXCEPT:

A short sale relieves the seller of any other outstanding obligations on the home, such as owner association fees or a second mortgage.

If a property is sold, either in fact or in substance (e.g., through a lease with an option to buy), which of the following clauses gives the lender the right to “accelerate” the loan, requiring the borrower to pay it off?

due-on-sale clause

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:

mortgagee.

In a mortgage loan agreement, the financial rights and obligations of borrower and lender are detailed in the:

note.

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?

an unambiguous description of the property that is being pledged as collateral for the loan

In calculating net operating income, vacancy losses must be subtracted from the gross income collected. The normal range for vacancy and collection losses for apartment, office, and retail properties is:

between five and fifteen percent.

In certain states, such as the state of Florida, the transfer of title to the lender does not occur until the borrower defaults. These states are referred to as:

lien theory states.

In certain states, such as the state of Georgia, there is a temporary transfer of title to the lender at the time the mortgage loan is made. The borrower then would obtain the rights to the title once the loan has been repaid. These states are referred to as:

title theory states.

In many commercial real estate loans, the lender cannot hold the borrower personally liable in the event of a default except for environmental contamination, fraud, or misappropriation of funds.. Such loans are commonly referred to as:

nonrecourse loans.

In real estate markets, a transaction occurs only when the investment value of the buyer exceeds the investment value of the seller. The buyer’s investment value is the _____________ that he or she would be willing to pay for a particular property, while the seller’s investment value is the _____________ that he or she would be willing to accept.

maximum; minimum

In the event a borrower defaults on the loan obligation, which of the following clauses enables the lender to declare the entire loan balance due and payable?

acceleration clause

Investment analysts and institutional investors adhere to a “below-line” treatment of capital expenditures. This implies which of the following?

Capital expenditures are subtracted from net operating income to obtain a net cash flow measure.

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 well after the closing and after the buyer takes possession, when dealing with a contract for deed?

title to the property passes to the buyer

It may be appropriate for a real estate professional to utilize different approaches for estimating the market value of a property depending upon the particular property type and use. Which of the following approaches would be most applicable when considering the valuation of retail office space (i.e., which approach would receive the most weight in the valuation process)?

income approach

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?

level-payment, fully amortizing loan

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 household?

Chapter 13 bankruptcy

Known popularly by its section in the Federal Bankruptcy Code, which of the following types of bankruptcy is the traditional form of bankruptcy wherein the court simply liquidates the assets of the debtor and distributes the proceeds to creditors in proportion to their share of total claims?

Chapter 7 bankruptcy

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?

reverse mortgage

Mortgage insurance rates vary with the perceived riskiness of the loan. Which of the following scenarios would result in a higher mortgage insurance premium?

higher loan-to-value ratio

Mortgage loans made to borrowers with normal credit quality, but who lack the necessary documentation of their financial circumstances typically needed to meet conforming mortgage standards would most likely be considered:

Alt-A loans.

Mortgage loans that allow the borrower to switch among a variety of payment arrangements throughout the life of the loan are more commonly referred to as:

option ARM loans.

Mortgage loans that fail one or more of the underwriting standards established by government sponsored enterprises are more commonly referred to as:

nonconforming loans.

Mortgage loans that meet all general underwriting standards established by government sponsored enterprises except for the dollar size limit are more commonly referred to as:

jumbo loans.

Mortgage originators can either hold loans in their portfolios or sell them to investors. When a mortgage originator decides to sell mortgages to another institution, this transaction occurs in what is commonly referred to as the:

secondary mortgage market.

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:

(fixed rate) level payment mortgage (LPM).

Most adjustable rate mortgage (ARM) loans have been marketed with a temporarily reduced interest rate commonly referred to as a:

teaser rate.

Most appraisers would say that report writing is one of the most important functions that they perform. Assume that an appraiser is putting together a report for a single-family home. Which of the following reporting options would be the most commonly used in this scenario?

summary appraisal report

Most real estate loans have a definite term to maturity, stated in years. Most home loans will typically have a term to maturity between:

15-30 years.

Net operating income is similar to which of the following measures of cash flow in corporate finance?

earnings before deductions for interest, depreciation, income taxes, and amortization (EBIDTA)

One complication that appraisers may face is the variety of lease types that may be available for a particular property type. Which of the following statements best describes a “graduated” or step-up lease?

The lease establishes schedule of rental rate increases over the term of the lease.

One reason for the difference between a property’s current market value and the total cost to replace it new is related to changes in tastes, preferences, technical innovations, or market standards. This is commonly referred to as:

functional obsolescence.

Operating expenses can be divided into two categories: variable and fixed expenses. Which of the following best exemplifies a fixed expense?

state and local property taxes

Operating expenses can be divided into two categories: variable and fixed expenses. Which of the following best exemplifies a variable operating expense?

utilities expenses

Private mortgage insurance (PMI) protects a lender against which of the following?

losses due to default on the loan

Real estate appraisal is often considered “more art than science,” since identifying truly comparable properties is a subjective process. Therefore, it is essential that a comparable property transaction at least meets the requirement that it be fairly negotiated under typical market conditions. Which of the following types of transactions would be most appropriate for use in the sales comparison approach to valuation?

arm’s-length transactions

Real estate appraisers generally distinguish among the concepts of market value, investment value, and transaction value. Which of the following statements best describes the concept of market value?

It is an estimate of the most probable selling price of a property in a competitive market.

Real estate professionals have long supported strict standards of ethics and practice. Followed by all states and federal regulatory agencies, which of the following imposes ethical obligations and minimum standards that must be followed by all real estate professionals providing formal estimates of market value?

Uniform Standards of Professional Appraisal Practice (USPAP)

Second mortgage loans in which borrowers borrow against the accumulated equity in their home are more commonly referred to as:

home equity loan.

Several techniques can be used to obtain an indication of land value. The cost approach to valuation would most likely be used for which of the following properties?

education facility

Since conforming loans can be much more readily bought and sold in the secondary mortgage market, they carry a(n) _________ interest rate than comparable nonconforming loans.

lower

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?

annual percentage rate

Standard mortgage loans require monthly payments typically composed of two components: interest and principal repayments. When scheduled mortgage payments are insufficient to pay all the accumulating interest, causing some interest to be added to the outstanding balance after each payment shortfall, the loan is said to be:

negatively amortizing.

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?

opportunity cost

The ability of homeowners to prepay the principal on their outstanding mortgage balance creates cash flow uncertainty for the lender. Which statement best describes prepayment restrictions on first mortgage home loans?

prepayment restrictions are prohibited in most cases

The actual rental income being paid in accordance with a legally binding commitment is more commonly referred to as the:

contract rent.

The cost approach to valuation assumes the market value of a new building is similar to the cost of constructing it today. Which of the following terms refers to the expenditure required to construct a building of equal utility using modern construction techniques, materials, and design that eliminates outdated aspects of the structure?

replacement cost

The difference between the current market value of a building and the total cost to reproduce it new is more commonly referred to as:

accrued depreciation.

The distinction between market rent and contract rent is important due to differences in lease terms. Office, retail, and warehouse tenants most commonly occupy their space under leases that run:

three to five years.

The dominant form of mortgage loan structure for income-producing property is a:

balloon mortgage loan.

The exact sequence of adjustments to the transaction price of a comparable property would make no difference if all adjustments were dollar adjustments. However, if percentage adjustments are involved then the sequence does matter. In making adjustments to a comparable property to arrive at a final adjusted sales price, the proper sequence for the following adjustments would be:

financing terms, market conditions, location.

The expected costs to make replacements, alterations, or improvements to a building that materially prolong its life and increase its value is referred to as:

capital expenditures.

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?

The insurance is paid by the borrower and protects the lender against loss due to borrower default.

The going-in cap rate, or overall capitalization rate, is a measure of the relationship between a property’s current income stream and its price or value. Which of the following statements regarding cap rates is true?

It is analogous to the dividend yield on a common stock.

The loan origination market, in which borrowers and lenders come together to provide adequate financing for the purchase of a property, is more commonly referred to as the:

primary mortgage market.

The market determined interest rate that is the “moving part” in an adjustable rate mortgage is more commonly referred to as the:

index rate.

The price we observe when a property is sold is more commonly referred to as the property’s:

transaction value.

The process in which an appraiser weighs the relative reliability of value indicators for the property being valued is more commonly referred to as:

reconciliation.

The process of converting periodic income into a value estimate is referred to as income capitalization. Income capitalization models can generally be categorized as either direct capitalization models or discounted cash flow forecasts (models are then used to create the forecasts). Which of the following statements best describes the direct capitalization method?

Value estimates are based on a multiple of the expected first year net operating income.

The proportion of potential gross income not collected, even when supply equals demand in the rental market, is more commonly referred to as the:

natural vacancy rate.

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?

interest rate spread

The rental income that a property would most probably command if all the space were continuously leased at current rental rates (and supply and demand is in balance) is more commonly referred to as the:

market rent.

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?

Chapter 11 bankruptcy

The value a particular investor places on a property is more commonly referred to as the property’s:

investment value.

To be considered a qualified mortgage, the loan must have specific features and meet designated underwriting requirements. Based on your understanding of what constitutes a qualified mortgage, all of the following features describe a qualified mortgage EXCEPT:

The loan does not require verification of underwriting information from third party records.

Using the “Net Operating Income / Cap Rate = Value” formula, many appraisers adhere to an “above-line” treatment of capital expenditures. This implies which of the following?

Capital expenditures are subtracted in the calculation of net operating income.

Using the “Value = Net Operating Income / Cap Rate” formula, the cap rate is an important metric that investors use to analyze the state of commercial real estate markets. When interpreting cap rate movements, an increase in cap rates over time would indicate that:

property values have decreased.

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 for lenders to treat a default as serious (i.e., a substantive default)?

90 days

When a borrower decides to stop making payments on an existing mortgage loan despite having the ability to make payments (typically when the home has lost value), this is more commonly referred to as a(n):

strategic default.

When a borrower defaults on a mortgage loan, his or her credit record will be adversely affected. While borrowers can recover from this reduction in their credit score, if a default goes into the borrower’s records it will remain for:

7 years.