Question 1

When a borrower does not qualify for a conventional mortgage, he might ask for and receive a subprime loan.

Accepted Answer

Generally, these borrowers have been disqualified from conventional loans because of a bad credit history or because of a low debt-to-income ratio. These loans generally have a much higher default rate than most of the conventional loans and are, thus, disfavored by lenders.

Question 2

The funds of the Troubled Asset Relief Program (TARP) are managed and allocated by the President of the United States.

Accepted Answer

The TARP program was designed to allow the government to buy many of the so-called troubled assets that had resulted from the securitization epidemic. TARP was initially funded with over $700 billion and is managed by the Secretary of the Treasury.

Question 3

Fred Farmer, the mortgagor, is entitled to a jury trial when Big Bank attempts foreclosure on his farm.

Accepted Answer

In a majority of jurisdictions, a mortgage is a lien on the land, thus a foreclosure is an equitable action on the land. The mortgagor (Fred Farmer) does not have a right to a jury trial in a foreclosure action.

Question 4

A furniture store that puts up its inventory as collateral for a loan will grant the lender a floating lien.

Accepted Answer

Creditors may obtain security interests in property acquired by the debtor after the original agreement is entered. The creditor does so by placing a provision in the security agreement that the security interest of the creditor also applies to goods the debtor acquires at a later time. It is known as a floating lien.

Question 5

Daisy attempts to put up Harry's property for a loan without Harry's knowledge or consent. Daisy has attached, but not perfected, Harry's property.

Accepted Answer

Attachment occurs when three conditions are met. First, the debtor has some ownership or possessive rights in the collateral. Second, the secured party (or creditor) transfers something of value, such as money, to the debtor. Third, the secured party takes possession of the collateral or signs a security agreement that describes the collateral. Perfection can either be by filing a financing statement or by a purchase money security interest.

Question 6

If Enrico purchases a house subject to a mortgage, Enrico agrees to continue paying the debt.

Accepted Answer

When purchasing a property with an existing mortgage, the buyer will either assume the mortgage or take the property subject to the mortgage. When buyers decide to assume the mortgage, they agree to pay it. When they take the property subject to a mortgage, the seller agrees to continue paying the debt.

Question 7

The Emergency Economic Stabilization Act (ESSA) of 2008 did not have the authority to limit executive compensation and the "golden parachutes" of CEOs of institutions who were granted TARP bailout funds.

Accepted Answer

On the contrary, ESSA had the authority to step in to limit the compensation received by the institutions that were granted the "bail-out" funds in TARP. The limits were designed to discourage any inducement program that would reward higher-ranking officers who permitted their institution to acquire unreasonably risky investments. Further, high-ranking officers were also not permitted to receive golden parachute deals.

Question 8

A security interest is automatically perfected when the secured party has a legally enforceable right to take the property and sell it to satisfy the debt.

Accepted Answer

A security interest attaches when the secured party has a legally enforceable right to take that property and sell it to satisfy the debt. A security interest is perfected when the secured party has done everything that the law requires to give the secured party greater rights to the goods than others have.

Question 9

After repossessing the goods, the secured party (the creditor) may sell them at a public auction or private sale.

Accepted Answer

After repossessing the goods, the secured party (the creditor) may sell them at a public auction or private sale. However, the terms of the sale must be reasonable, and the debtor must be given notice of the time and place of any public auction, so that he or she may bid on them personally.

Question 10

If a mortgage is not recorded and a later mortgage is given on the same property, the new mortgage is superior to the first.

Accepted Answer

A mortgage must be in writing and recorded in the county where the property is located (usually the county clerk). Recording a mortgage notifies any third party who may be interested in purchasing the property or in lending money to the owner that the mortgagee has an interest in the real property covered by the mortgage. Failure to record the first mortgage does not remove the obligation of the mortgagor to the first mortgage; the debt simply becomes unsecured.

Question 11

A security agreement can either be oral or in writing.

Accepted Answer

A security agreement must be in writing, be signed by the debtor, and contain a description of the collateral that is used for security.

Question 12

By taking a graduated-payment mortgage, Jake will pay a fixed interest rate and make increased monthly payments over the term of the loan.

Accepted Answer

A graduated-payment mortgage has a fixed interest rate during the life of the mortgage; however, the monthly payments made by the mortgagor increase over the term of the loan.

Question 13

A reverse mortgage is a type of loan that allows older homeowners to convert some of the equity in their home into cash, while retaining ownership of their home.

Accepted Answer

A reverse mortgage is a type of loan that allows older homeowners to convert some of the equity in their home into cash, while retaining ownership of their home.

Question 14

The mortgagee has the unrestricted right to sell, assign, or transfer the mortgage to a third party.

Accepted Answer

Whatever rights the mortgagee had in the mortgage are then the rights of the assignee. The only way the mortgagor could stop the mortgagee from assigning the mortgage is to pay the mortgagee everything owed on the mortgage.

Question 15

A deed of trust is requires court action to sell property upon default of the debtor.

Accepted Answer

The provisions of many deeds of trust allow the trustee to sell the property without going to court. For this reason, some legal authorities do not consider a deed of trust a true mortgage, because true mortgages require a foreclosure action for the sale of the property.

Question 16

A conventional fixed-rate mortgage involves no government backing by either insurance or guarantee.

Accepted Answer

Conventional fixed-rate mortgages are made by private lenders with the risk of loss borne exclusively by them, usually with no government insurance or guarantee.

Question 17

Linda puts up her land as collateral for a loan from Small Bank. Linda is a mortgagee.

Accepted Answer

The one who borrows the money (the mortgagor) conveys his or her interest in the property to the lender (the mortgagee), while at the same time retaining possession of the property.

Question 18

A mortgagee has the right to equity of redemption.

Accepted Answer

A mortgagor (not mortgagee) has the right to equity of redemption. That means he has the right to pay off the mortgage in full, including interest, and discharge the entire debt.

Question 19

Furniture loans, home improvement loans, student loans, and construction loans are examples of mortgage-backed securities.

Accepted Answer

The process of securitization begins when a bank or other lender lends money to a borrower who pays off the loan over time with interest. The lender makes money on the interest at a slow and steady rate over a period of years (decades-actually-when speaking of real property). If the loan is for land, it is a mortgage-backed security; if for personal property, it is an asset-backed security. "Bundling" these securities to big investors, (like pension funds) would then reap the benefit of the interest payments multiplied by the number of loans purchased in that bundle over a long period of time.

Question 20

Only personal property can be used to secure a debt.

Accepted Answer

Both real property and personal property can be used to secure a debt.

Quiz 20: Mortgages and Security Interests

When a borrower does not qualify for a conventional mortgage, he might ask for and receive a subprime loan.

The funds of the Troubled Asset Relief Program (TARP) are managed and allocated by the President of the United States.

Fred Farmer, the mortgagor, is entitled to a jury trial when Big Bank attempts foreclosure on his farm.

A furniture store that puts up its inventory as collateral for a loan will grant the lender a floating lien.

Daisy attempts to put up Harry's property for a loan without Harry's knowledge or consent. Daisy has attached, but not perfected, Harry's property.

If Enrico purchases a house subject to a mortgage, Enrico agrees to continue paying the debt.

The Emergency Economic Stabilization Act (ESSA) of 2008 did not have the authority to limit executive compensation and the "golden parachutes" of CEOs of institutions who were granted TARP bailout funds.

A security interest is automatically perfected when the secured party has a legally enforceable right to take the property and sell it to satisfy the debt.

After repossessing the goods, the secured party (the creditor) may sell them at a public auction or private sale.

If a mortgage is not recorded and a later mortgage is given on the same property, the new mortgage is superior to the first.

A security agreement can either be oral or in writing.

By taking a graduated-payment mortgage, Jake will pay a fixed interest rate and make increased monthly payments over the term of the loan.

A reverse mortgage is a type of loan that allows older homeowners to convert some of the equity in their home into cash, while retaining ownership of their home.

The mortgagee has the unrestricted right to sell, assign, or transfer the mortgage to a third party.

A deed of trust is requires court action to sell property upon default of the debtor.

A conventional fixed-rate mortgage involves no government backing by either insurance or guarantee.

Linda puts up her land as collateral for a loan from Small Bank. Linda is a mortgagee.

A mortgagee has the right to equity of redemption.

Furniture loans, home improvement loans, student loans, and construction loans are examples of mortgage-backed securities.

Only personal property can be used to secure a debt.