Banking Mortgage Banking 1 — Questions and Answers
Question 1: What is the primary purpose of the secondary mortgage market?
- To allow banks to issue new mortgages directly to consumers
- To provide liquidity by buying and selling existing mortgage loans (Correct answer)
- To set interest rates for new home purchases
- To insure mortgages against default
Correct answer: To provide liquidity by buying and selling existing mortgage loans
The secondary mortgage market (e.g., Fannie Mae, Freddie Mac) purchases existing mortgages from lenders, providing liquidity so lenders can originate more loans.
Question 2: What does LTV (Loan-to-Value ratio) measure?
- The borrower's monthly debt payments compared to gross income
- The loan amount divided by the appraised value of the property (Correct answer)
- The lender's profit margin on a mortgage transaction
- The ratio of fixed-rate to adjustable-rate mortgages in a portfolio
Correct answer: The loan amount divided by the appraised value of the property
LTV is calculated by dividing the loan amount by the appraised or purchase price of the property and is expressed as a percentage.
Question 3: Which government-sponsored enterprise (GSE) is primarily focused on the U.S. mortgage market?
- Federal Reserve Bank
- Small Business Administration (SBA)
- Fannie Mae (FNMA) (Correct answer)
- Export-Import Bank
Correct answer: Fannie Mae (FNMA)
Fannie Mae (Federal National Mortgage Association) is a GSE created specifically to expand the secondary mortgage market and support homeownership.
Question 4: What is a mortgage escrow account primarily used for?
- Storing the borrower's down payment before closing
- Collecting and paying property taxes and insurance on behalf of the borrower (Correct answer)
- Holding reserve funds for lender emergencies
- Managing the lender's investment portfolio
Correct answer: Collecting and paying property taxes and insurance on behalf of the borrower
Escrow accounts collect monthly contributions from borrowers so that property taxes and homeowner's insurance premiums can be paid when due.
Question 5: What is the standard maximum Debt-to-Income (DTI) ratio used in conventional mortgage underwriting?
- 28%
- 36%
- 43% (Correct answer)
- 55%
Correct answer: 43%
Most conventional mortgage programs use a maximum back-end DTI of 43%, though some automated underwriting approvals allow higher ratios with compensating factors.
Question 6: What does mortgage 'amortization' describe?
- The process of calculating a borrower's credit score for approval
- The gradual reduction of the loan balance through scheduled principal and interest payments (Correct answer)
- The penalty fee charged for paying off a mortgage early
- The periodic adjustment of interest rates on variable-rate loans
Correct answer: The gradual reduction of the loan balance through scheduled principal and interest payments
Amortization is the schedule by which each payment reduces the outstanding principal balance while also covering interest, resulting in full payoff at the end of the loan term.
Question 7: Under the TILA-RESPA Integrated Disclosure (TRID) rule, which document must a lender provide to a borrower within 3 business days of receiving a mortgage application?
- Truth in Savings Disclosure
- Notice of Right to Cancel
- Loan Estimate (LE) (Correct answer)
- HUD-1 Settlement Statement
Correct answer: Loan Estimate (LE)
The Loan Estimate replaced the former Good Faith Estimate and TIL disclosure under TRID, giving borrowers a standardized three-page summary of loan terms and estimated costs.
Banking Mortgage Banking 1
What is the primary purpose of the secondary mortgage market?