hw4_answersnewpdf_Solutions - ANSWERS TO HOMEWORK QUESTIONS...

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16. What is the motivation for the creation of a reverse mortgage? The major motivation is to help homeowners (usually older borrowers who may be retired) who want to receive a cash flow from the equity in their home. For these homeowners a reverse mortgage is the best way of achieving their goal. More details are supplied below. Reverse mortgages are designed for senior homeowners who want to convert their home equity into cash. Fannie Mae, for instance, offers two types of reverse mortgages for senior borrowers. The Home Keeper Mortgage is an adjustable-rate conventional reverse mortgage for borrowers who are at least 62 years of age, and who either own the home outright or have a low amount of unpaid principal balance. The other type of reverse mortgage, Home Keeper for Home Purchase, enables senior borrowers to buy a new home with a combination of personal funds and a calculated amount of reverse mortgage that is based upon the borrower’s age, number of borrowers, the adjusted property value, and the equity share option chosen. 17. Answer the following questions. a. Explain why you agree or disagree with the following statement: “Only borrowers with highly impaired credit can obtain a high LTV loan.” One would disagree with this statement that only borrowers with good credit would be expected to obtain a high LTV loan (where the LTV is the ratio of the amount of the loan to the market value of the property). Everything else equal, a lower LTV loan provides more protection to the lender if the property must be repossessed and sold. Borrowers with impaired credit would be expected to put down more money making the LTV ratio lower. An exception might be a situation where insurance can be obtained so as to counterbalance the situation of the borrower with impaired credit. Traditionally for a conventional, conforming loan, borrowers were required to make a down payment of 20% when qualifying for a mortgage. However, today a borrower with good credit has the option of making a lesser or no down payment, resulting in loans with higher LTVs. For borrowers interested in conventional, nonconforming loans, programs available for 103% LTV require no down payment because 100% of the home’s price, as well as an additional 3% for closing costs, can be financed into the mortgage. b. Explain why you agree or disagree with the following statement: “An alt-A loan is a conventional, conforming loan.” Let us begin by defining conventional and conforming loans. A conventional loan is when the lender makes the loan based on the credit and collateral of the borrower (and for which the lender also may take out mortgage insurance to provide a guarantee for the fulfillment of the borrower’s obligations). A conforming mortgage is one that meets the underwriting standards established for being in a pool of mortgages underlying a security that the pool guarantees. 1
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hw4_answersnewpdf_Solutions - ANSWERS TO HOMEWORK QUESTIONS...

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