7. A Bank makes a 360-month mortgage loan to a traditional (Prime) Borrower. The cost of the house was $250,000 and the original amount of the loan was $200,000. The Bank charged the Borrower an interest rate of 4.5%, which was a fair rate at the time. The Bank wants to test the likelihood that the loan will become underwater after two years. By how much would the house have to change in value each year for the Bank to be worried about this loan going under water?

a. -1.7%

b. -12.0%

c. -22.6%

d. -5.4%

e. -8.9%

8. A Bank makes a 360-month mortgage loan to a Sub-Prime Borrower. The cost of the house was $250,000 and the original amount of the loan was $245,000. The Bank offered the Borrower a teaser loan for the first two years of the contract, where the payment was based on a rate of 1.4%; the rate would increase to the market rate of return for this Sub-Primer Borrower of 7.9% after the two-year introductory period. The Bank wants to test the likelihood that the loan will become underwater after two years. By how much would the house have to change in value each year for the bank NOT to be worried about this loan going under water?

a. +3.0%

b. +6.1%

c. +4.0%

d. +2.1%

e. +4.5%