Ch 12 - Note: These notes should at best be considered the...

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Note: These notes should at best be considered the outline or summary of lectures delivered in class. Class lectures contain much more material than these notes indicate . Mortgages A mortgage is generally a long-term loan secured by real estate. In recent years, mortgages became available which have rather short maturity. But because of the financial crisis of 2007-09, mainly caused by mortgages, shorter term mortgages may become rarer. The mortgage market differs from the securities market in important ways: - Usual borrowers in the securities markets are governments and businesses, whereas the mortgage market borrowers are dominated by individuals - Mortgages loans are made for varying amounts and maturities, features that cause problems for the development of secondary markets (which prefer standardized securities) Mortgages are generally amortized – that is not the case with bonds. Of course, balloon- payments mortgages have the repayment of the principal upon maturity in common with bonds. Note: you should understand how loan amortization works; are regular payments on such loans fixed and what is the time-pattern of the fraction of the payment is interest and principal? Is a mortgage an annuity or perpetuity? Why? Observation: a 15- year mortgage and a bond that matures in 15 years both mature in 15 years, but the mortgage has a much shorter duration. Why? History : The American dream has included home ownership almost from the outset. Home ownership has definitely been something that the government has concerned itself for a couple of centuries, even though government non-interference with citizen lives and markets has been a central issue in American policy. Both Presidents Clinton and Bush adopted policies, and the US congress passed the necessary legislation, to promote home ownership; the federal government actively pressed various government agencies to help Americans to buy homes. And the Fed assisted by letting lenders to follow loose practices in order to extend mortgages to those who would not qualify under normal circumstances. States used to prohibit banks to make mortgage loans – authorities didn’t want bank funds to be tied up in long-term loans. Mortgages were arranged between individuals, with the help of lawyers to draft the contracts – a costly affair. So mortgage loans were available to the wealthy and well-connected. By the 1880s: bankers had learned to raise long-term funds needed for mortgages by
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Ch 12 - Note: These notes should at best be considered the...

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