Econ+310+Winter+2010+Topic+3_b_

Econ+310+Winter+2010+Topic+3_b_ - Economics310...

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Topic 3(b) Origins of recent  liquidity crisis Economics 310  Money and Banking
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2 Lecture 1 Reading Today Chapter 9, pages 207 - 212 Financial Crises and the Subprime  Meltdown Next Class Chapter 4 Understanding Interest Rates
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3 Lecture 1 The sub-prime mortgage market and  the current credit crunch Mortgages issued in two main varieties 1. Prime mortgages issued to borrowers with: Good credit history Low debt/equity loans Loans for small amounts i.e. “safe” borrowers 1. Sub-prime mortgages are issued to borrowers with Poor credit history High debt/equity loans Jumbo loans i.e. “risky” mortgages
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4 Lecture 1 The sub-prime mortgage market and  the current credit crunch Long period of appreciation in housing prices: Encouraged housing market speculation Demand for mortgage funds very high Borrowers anxious to protect equity in their houses Low default rate on mortgages Supply of mortgage funds very high (“easy credit”) Moral Hazard Lenders able to sell loans to others Appraisers able to misrepresent value of houses
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This note was uploaded on 09/28/2010 for the course ECON 310 taught by Professor Hogan during the Winter '08 term at University of Michigan.

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Econ+310+Winter+2010+Topic+3_b_ - Economics310...

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