# Ethics Questions Assignments: Loans

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1. Steve Chef has annual income of \$48,000 and a long-term debt service obligation on car and boat loans totaling \$350 per month. Assuming he is considered an acceptable credit risk, how much can he borrow on a 6.75 percent, 30-year mortgage, 80 percent LTV loan if the lender’s allowable housing expense-to-income ratio is 28 percent and its total-debt-service-toincome ratio is 35 percent? Steve’s taxes and insurance on his new home will be \$1,440 per year.

2. Instead of the 6.75 percent loan in Problem 1, should Steve pay two points to get a 6.25 percent, \$170,000, monthly payment, 30-year loan? Steve’s combined federal and state income tax rate is 29 percent, and his opportunity cost is 12 percent. Steve plans to sell his house in 4 years.

3. What should be Steve’s decision in Problem 2 if he keeps the house for 6 years?

4. Kennedie obtained a 15-year, 7 percent, fully amortizing, monthly payment, \$150,000 mortgage 1 year ago. If she can get a new 15-year mortgage at 6.5 percent with \$1,500 in costs, should she refi nance her old mortgage? Her combined tax rate is 26 percent, and her opportunity cost is 11 percent. She plans to keep the mortgage for 3 more years.

5. What should Kennedie do in Problem 4 if she plans to keep the mortgage for 4 more years instead of 3 more years?

6.When loans are sold into the secondary market, there are several factors that influence the value investors are willing to pay for them. What are some of the factors that influence value and why are they important to consider when valuing loans?

Ethics

Based on the ethics code reading here, discuss how you would respond to a client who wants to apply for a loan they cannot afford?