Question

1a.Which of the following is false?

A. A 5/1 HYBRID ARM loan is a 5-year fixed rate after which the interest rate would become adjustable, tied to an index, and would be reset each year thereafter.

B. The expected cost of borrowing depends on the frequency of payment adjustments.

C. If an ARM index increased 15%, the negative amortization on a loan with a 5% annual payment cap is calculated by totaling the difference between the payment as if no cap existed and the 5% capped payment.

D. Given that every other factor is equal, ARMs will have the lower expected cost for an ARM with no caps as compared to an ARM with negative amortization.

1b.Which of the following is FALSE?

A. ARMs tied to short-term indices are safer to lenders than ARMs tied to long-term indices

B. For an ARM loan, any interest forgone because of limitations or caps will be become a part of the loan balance but will not accrue compound interest

1c.Which of the following is TRUE?

A. Tighter interest rate adjustment caps on an ARM means greater interest rate risk to lenders.

B. A reverse mortgage is structured as rising equity, rising debt loan.

C. A Price Level Adjusted Mortgage does not involve negative amortization.

D. The longer the time between rate adjustments on an adjustable-rate mortgage the more risk assumed by borrowers.

1d. Which of the following is False?

A. For reverse mortgage loans, borrowers take all the interest rate risk.

B. For PLAM loans, lenders and borrowers share the interest rate risk.

C. For CAM loans, lenders take all the interest rate risk.

D. For CPM loans, lenders take all the interest rate risk.

Answer 1

1A

option C is false.

If an ARM index increased 15%, the negative amortization on a loan with a 5% annual payment cap is calculated by compounding the difference between the payment as if no cap existed and the 5% capped payment.

And not by "totaling the difference between the payment as if no cap existed and the 5% capped payment".

Option A, B and D are true.

A 5/1 HYBRID ARM loan is a 5-year fixed rate after which the interest rate would become adjustable, tied to an index, and would be reset each year thereafter. 5 represents the years of fixed rate and 1 is the frequency of rates to be revised. The expected cost of borrowing depends on the frequency of payment adjustments. And ARMs will have the lower expected cost for an ARM with no caps as compared to an ARM with negative amortization.

1B

Option A is false.

Short term indices fluctuate more sharply than longer term indexes, so mortgage payments may change more dramatically and thus it involves higher risk. Long term indices are more gradual in their movements, however, long term interest rates generally tend to be higher than short term rates.

Option B, is true. In ARM, any interest forgone will not accrue compound interest

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