Quiz 9: Real Estate Finance: the Laws and Contracts


Clear, consistent, and enforceable mortgage law is critical to the real estate finance system for many reasons. Since debt financing is used in most real estate transactions, eliminating uncertainty is crucial for both parties in the transaction. Certainty reduces the cost of borrowing. The lender can be more certain of the rights and risks involved, which reduces the necessary risk premium required in the interest rate. The borrower benefits from the same certainty both due to a lower interest rate, and due to the greater predictability of outcome. For example, the borrower can understand, in case of delinquent payments, how much risk actually is involved. For most individuals, a debt-financed home purchase will be the largest financial transaction that they will undertake. The lender is more informed than is the borrower in mortgage transactions. Therefore, it is necessary to establish clear laws to protect consumers and place them on equal footing. Mortgage financing is also a complicated process and requires unambiguous mortgage law to anticipate all possible issues that may arise. Standardized mortgage law is also important to financial markets, as mortgage markets have become national because this enhances trading liquidly and has served to reduce the cost of borrowing to potential homeowners.

The index rate is a market determined interest rate that is the "moving part" in an adjustable interest rate. Therefore the answer is b Index

The mortgage lender is entitled to the value of the mortgage indebtedness under both Chapter 7 and Chapter 13 because their claim has priority. However, Chapter 13 is essentially a debt workout plan that will most likely delay the efforts by a lender to foreclose on the property. Delays may cost the lender opportunity costs through uncollected interest and legal expenses. Addtionally, the value of the property may deteriorate due to neglect during this process.