HW2_AK - Solution Key to Problem Set 2 ECN 134 Finance...

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Solution Key to Problem Set 2 ECN 134 Finance Economics Prof. Farshid Mojaver Part A: Financial Crisis The Fed cut rates too low for too long Easing of mortgage lending standards followed by tightening Expansion of credit through poorly underwritten and overly risky mortgage lending. There was a dramatic decline in mortgage lending standards from 2001 through 2006 Interest-only mortgages (vs. full amortizing): In 2005, 29% of the new mortgages were interest only vs. 1% in 2001 No money down: In 1989, the average down payment all homebuyers were 20%; in 2007, it was 10%. Interest only loans, sub-prime loans, negative amortization loans, low or zero- equity loans, and teaser-rate adjustable rate mortgages (ARMs), all funded through secondary markets, became increasingly prevalent in the U.S. after 2003 and today account for over half of all foreclosures. Early in the 1990 decade, nonprime lending was insignificant; by 2006 non-prime lending constituted 47% of mortgage originations. The unprecedented expansion
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This note was uploaded on 11/02/2009 for the course ECON 134 taught by Professor Mojaver during the Summer '08 term at UC Davis.

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HW2_AK - Solution Key to Problem Set 2 ECN 134 Finance...

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