10-14-09 - Economics 448 Class Notes 10/14/09 Economics...

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Economics 448 – Class Notes – 10/14/09 Economics 448: Mortgage Markets at Work There is a promise of a stream of payments from homeowner to mortgage lender The “promises” are very illiquid – if I wanted money in the short term, I couldn’t get money from these illiquid assets Example: a 30-year obligation (loan obligation) o This was a real problem during the depression: o I took the money from savers and gave it to borrowers. o The borrowers wont give the money back for another 30 years Freddie Mac – will buy your loans and guarantee your loans and then try to sell these loans to other people Secondary Mortgage market Good because loans could be sold to Freddie Mac This generated liquidity in the mortgage market where it used to be really illiquid Freddie Mac free up liquidity in the mortgage market MAIN PURPOSE Nobody understood the risk involved in the loans that were purchased – AAA rating vs. BBB rating The interest rate for someone with a BBB credit rating are going to have a higher
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10-14-09 - Economics 448 Class Notes 10/14/09 Economics...

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