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Unformatted text preview: ituation is, therefore, one of enormous importance to both the lender and the borrower, and both should approach the mortgage selection process with great care and attention to the mutual needs and interests of themselves and the other party or parties. Historically, lenders have a problem with cycles of tight and loose money. This unsteady flow of funds is disruptive to their operations and to the housing industry. When money is tight, it flows out of thrift institutions because depositors can obtain higher yields elsewhere–the phenomenon described in Chapter 2 as disintermediation. Advocates of alternative loans say that this problem can be reduced by using adjustable rate mortgages. If money gets tight and interest rates rise, the thrift institutions should be allowed to increase the rate they pay their depositors in order to prevent an outflow of savings. However, in order to pay higher interest on savings accounts, lenders must receive a higher interest rate on their existing loans. With an adjustable rate mortgage, lenders could increase interest rates on their existing loans when they need to increase the interest rate to attract or keep savings accounts. This overcomes the problem referred to as “borrowing short and lending long”: Savings and checking deposits constitute loans from depositors to the financial institutions, for which they pay a modest return to the depositor, who usually keeps funds for very short Dynasty School (www.dynastySchool.com) 9-7 REAL ESTATE FINANCE
periods; but a home loan to that same depositor would commit the financial institution to a long term, typically 30 years. LEGISLATION
In 1983 federal legislation set up new regulations replacing those established during the “formative” years of alternative mortgage instruments. These new regulations allowed more flexibility for both federally chartered banks and savings and loan associations in offering adjustable rate mortgages, or ARMs. CONSUMER HANDBOOK
The “Consumer Handbook on Adjustable Rate Mortgages,” prepared by the Federal Reserve...
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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