Fixed Income MCQ - Fixed Income Section 1

66 Sean obtains a 10 million GBP mortgage loan from Barclays Bank. Two years later, the principal on the loan is 8 million GBP and Sean defaults on the loan. Barclays Bank forecloses the loan, sells the property for 6 million GBP, and is entitled to collect the shortfall, 2 million GBP, from Sean. Sean most likely had a:

Barclays Bank has a claim against Sean for the shortfall between the amount of the mortgage balance outstanding and the proceeds received from the sale of the property. This indicates that the mortgage loan is a recourse loan. If Sean had a non- recourse loan, the bank would have only been entitled to the proceeds from the sale of the underlying property.

67 Maria obtains a non-recourse mortgage loan for PKR 8,000,000. Three year later, when the outstanding balance of the mortgage is PKR 5,000,000, Maria cannot make her mortgage payments and defaults on the loan. The lender forecloses and sells the house for PKR 3,750,000. What amount is the lender entitled to claim from Maria?

For a non-recourse loan, the bank can only look to the underlying property to recover the outstanding mortgage balance and has no further claim against the borrower. The bank is simply entitled to foreclose on the home and sell it.

68 Charles Dent obtains a non-recourse loan for $200,000. A year later the principal on the loan is $180,000 and Charles defaults on the loan. The lender forecloses and sells the house for $150,000. What amount is the lender entitled to claim from Charles?

In a non-recourse loan, the lender can only look to the underlying property to recover the outstanding mortgage balance and has no further claim against the borrower.

69 A mortgage starts out with a fixed rate and then becomes an adjustable rate after a specified initial term. The mortgage is most likely a:

When the mortgage starts out with a fixed rate and then becomes an adjustable rate after a specified initial term, the mortgage is referred to as a hybrid mortgage. If the mortgage rate is fixed for some initial period and is then adjusted to a new fixed rate, the mortgage is referred to as a rollover or renegotiable mortgage.

70 Which of the following statements about convertible mortgages is most accurate?

In a convertible mortgage, the mortgage rate is initially either a fixed rate or an adjustable rate. At some point, the borrower has the option to convert into a fixed rate or an adjustable rate for the remainder of the mortgage’s life.