CMA Loan Servicing and Portfolio Management 2 — Questions and Answers
Question 1: In a short sale, the proceeds from the sale of the property are:
- Greater than the outstanding mortgage balance
- Equal to the outstanding mortgage balance
- Less than the outstanding mortgage balance (Correct answer)
- Held in escrow until the borrower recovers financially
Correct answer: Less than the outstanding mortgage balance
A short sale occurs when the home sells for less than the mortgage balance owed, requiring lender approval since the proceeds do not fully repay the debt.
Question 2: A deed in lieu of foreclosure benefits the lender primarily by:
- Eliminating the need to obtain a new title policy
- Avoiding the time and expense of the formal foreclosure process (Correct answer)
- Guaranteeing the property sells at market value
- Requiring the borrower to continue making reduced payments
Correct answer: Avoiding the time and expense of the formal foreclosure process
When a borrower voluntarily deeds the property to the lender, it eliminates the lengthy and costly formal foreclosure process while achieving the same outcome for the lender.
Question 3: What is the primary distinction between a mortgage servicer and a mortgage lender?
- The servicer provides loan funds, while the lender manages ongoing payments
- The lender funds the loan, while the servicer manages it after origination (Correct answer)
- The servicer sets interest rates, while the lender handles underwriting
- There is no meaningful distinction; the terms are interchangeable
Correct answer: The lender funds the loan, while the servicer manages it after origination
The lender originates and funds the loan at closing, while the servicer manages day-to-day administration of the loan on behalf of the investor who owns it.
Question 4: Which statement best describes a 'non-performing loan' (NPL) in a mortgage portfolio?
- A loan that was recently originated and has not yet had a payment due
- A loan on which the borrower has stopped making required payments (Correct answer)
- A loan that has been paid off ahead of schedule
- A loan that was sold to a government-sponsored enterprise
Correct answer: A loan on which the borrower has stopped making required payments
A non-performing loan is one where the borrower is in default or has stopped making payments, causing it to generate no expected income for the portfolio holder.
Question 5: Real Estate Owned (REO) properties are best described as:
- Properties purchased directly by mortgage servicers as investments
- Properties acquired by a lender after an unsuccessful foreclosure auction (Correct answer)
- Commercial real estate held by investment banks
- Rental properties managed by government agencies
Correct answer: Properties acquired by a lender after an unsuccessful foreclosure auction
REO properties are those a lender takes ownership of when a foreclosure sale does not generate enough proceeds to cover the loan balance, leaving the lender as the property owner.
Question 6: Prepayment risk in a mortgage portfolio refers to the possibility that:
- Borrowers will default before making any payments
- Borrowers will repay their loans earlier than expected, reducing future interest income (Correct answer)
- Interest rates will rise, increasing borrower default rates
- The servicer will transfer the loan without proper notice
Correct answer: Borrowers will repay their loans earlier than expected, reducing future interest income
Prepayment risk occurs when borrowers pay off mortgages early (often by refinancing), eliminating the investor's anticipated stream of interest income.
Question 7: Under the Dodd-Frank Act's mortgage servicing rules, a servicer must acknowledge receipt of a written borrower request for loss mitigation within:
- 3 business days
- 5 business days (Correct answer)
- 10 business days
- 30 calendar days
Correct answer: 5 business days
Servicers must acknowledge a complete loss mitigation application within 5 business days as required by CFPB mortgage servicing rules under Dodd-Frank.
CMA Loan Servicing and Portfolio Management 2
In a short sale, the proceeds from the sale of the property are: