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Unformatted text preview: is disintermediation. This is the taking out or the withdrawal of funds from the institutional lender and the reinvesting in some other savings instrument with a higher yield. Disintermediation was a very important action that happened during the recession of 1979–1981. Depositors were withdrawing their savings from the savings associations in record amounts in order to try to keep up with inflation. The term became frequently used during the recession, and it has a great impact on the real estate market. The more disintermediation, the fewer funds there are available to lenders to make real estate loans. Now that we have some idea of what an institutional lender is, let us see how mortgage loans are distributed among the institutional lenders. According to the circular flow of the economy, income that is not taxed away or consumed in the marketplace represents savings. Where these savings go depends largely on the kinds of returns desired by the saver. Many dollars flow into savings or commercial bank accounts, CDs, credit unions, life insurance premiums, and so on. If people suddenly withdraw their savings and buy government notes and money market funds, the supply of mortgage money declines and the real estate market can enter into a deep slump. REINTERMEDIATION
When the flow of savings again returns to the thrift institutions that act as intermediaries for the placement of mortgage loans, this process is referred to as reintermediation. If yields on government bonds plunge or the stock market crashes, money may reenter banks and thrift institutions in search of safety. As money returns to thrift institutions, the funds available for real estate loans increase, interest rates soften, more buyers can qualify for loans, and the housing market begins to pick up. Thus the processes of intermediation, disintermediation, and reintermediation all have a dramatic impact on the real estate market. To understand this process fully, we must examine the role of the Federal Reserve System and the U.S. Treasury. Dynasty School (www.dynastySchool.com) 2-7 REAL...
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This note was uploaded on 12/30/2010 for the course SOC 101 taught by Professor Zhung during the Spring '10 term at Punjab Engineering College.
- Spring '10