1. Define security interest and how it has been used in real estate finance since the Industrial Revolution.
Security interest is a legal claim on the collateral given to secure a loan. The security interest on a loan lowers the risk for the lender, which allows the lender to offer lower interest rates.

2. What is meant by the term collateral? By hypothecation?
The term collateral refers to a security, usually an asset, as protection for a lender to assure repayment of a loan.
The term hypothecation refers to the pledge or agreement made in order to secure the loan, which usually involves some sort of collateral for the debt.

3. What is the purpose of a promissory note? Of a mortgage?
A promissory note is evidence of a loan between a mortgager and a mortgagee. The promissory note will provide that the loan must be paid back.
The mortgage is the document in which the collateral for the loan is described in the promissory note.

4. Describe the origin of a loan discount.
In earlier societies charging interest for the use of one’s money was considered a sin by religious groups. Still today, some societies do not permit interest to be paid. To get around this restrictions, an up-front fee was charged, deducted from the loan and called a discount.

5. What is the federal agency underwriting function and what does it do for the mortgage market, and ultimately for the borrower?
The federal agency underwriting function is to purchase the loans made by others and to make it salable, sell it and make a profit. This is where an increasing portion of money for loans come from. This will stimulate the mortgage market and provide incentives to the borrowers, such as increasing the availability of different types of loans.

6. Compare and contrast the two categories of bonds and how they differ from mortgage-backed securities and the collateral pledged for each.
Stock certificates represent ownership of interest in a corporation and carries no obligation of repayment. Bonds are debt instruments representing money borrowed and repayment is required with interest due.
Most bonds are secured by a pledge of certain assets where as mortgage backed securities are pledged by a large group of loans.

7. Distinguish between the functions of the primary and secondary mortgage markets.
The primary mortgage market is made up of lenders that originate mortgage loans, they make money available directly to borrowers. The secondary mortgage market helps lenders, that make up the primary market, raise capital so that they can continue making mortgage loans.

8. Discuss the effects of risk and term of a bond on the interest rate paid.
The term of a bond can offer an interest rate that would yield a certain return allowing for a profit when redeemed at maturity. The risk is if the bond is redeemed before maturity, there could be a loss, rather than a profit, if the market is low.

9. What are some of the constraints on the recovery and growth of the GSE and private mortgage-backed securities market?
Constraints imposed on the underwriters loan purchase policies have slowed recovery.

10. How can pre-purchase home-buyer education programs affect the mortgage market?
Pre-purchase home-buyer education programs affect the mortgage market by increasing the benefit options for buyers. Buyers can become eligible for financial perks such as grants, closing-cost assistance, below market mortgage rates, and/or down-payment assistance. These types of perks will assist the buyer and lower or even eliminate the risk of foreclosure. With the education buyers may also opt for different loan options, increasing the salability of the loans.