ECN410-Lecture 1b - Introduction-Fall2010-revised-9-7-10

ECN410-Lecture 1b- - Very Brief Overview of U.S Mortgage Market 1 Flow of Funds in the Savings-Investment Cycle Savings-Investment Cycle Identity

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1 Very Brief Overview of U.S. Mortgage Market 1 Flow of Funds in the Savings-Investment Cycle Savings-Investment Cycle Identity Savings equals investment! Financial markets are the means by which savings are Financial markets are the means by which savings are transferred from surplus income units to deficit income units. Funds flow from surplus to deficit income units either directly or indirectly through intermediaries . 2
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2 Financial Intermediaries Commercial Banks; Thrifts Life Insurance and Surplus Income Units Individuals Deficit Income Units Individuals Flow of Funds in the Savings-Investment Cycle Investment Companies Pension Funds Businesses Governments Direct Finance Brokers Mortgage Bankers Businesses Governments 3 Secondary Mortgage Market FNMA, GNMA, FHLMC, Private Firms See Figure 1-1, Textbook Commercial Banks Thrift Institutions Si d L A i t i Financial Intermediaries Savings and Loan Associations Mutual Savings Banks Credit Unions Life Insurance Companies Pension Funds Investment Companie 4 Investment Companies Mutual Funds REITS
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3 Commercial Banks Accept demand deposits (checking accounts) and time deposits (sa ings acco nts and certificates of deposit Financial Intermediaries deposits (savings accounts and certificates of deposit) Can also borrow funds from other sources Supervised by the Federal Reserve System Deposits are insured by the Federal Deposit Insurance Corporation (FDIC). 5 Thrift Institutions Major depository of individuals’ savings. Financial Intermediaries Prior to 1980 regulation prohibited Thrifts from accepting demand deposits (checking accounts) 1982 deregulation allowed Thrifts to expand their investments from residential mortgages to other investments, including commercial mortgages. Deposits insured by the FDIC. 6 Little practical distinction between Thrifts and Commercial banks for our purposes.
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4 Life Insurance Companies Receive periodic payments in exchange for a promise to make f t re pa ments if certain e ents occ r Financial Intermediaries make future payments if certain events occur.
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ECN410-Lecture 1b- - Very Brief Overview of U.S Mortgage Market 1 Flow of Funds in the Savings-Investment Cycle Savings-Investment Cycle Identity

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