Chap007 - Chapter 07 - Mortgage Markets Answers to Chapter...

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Chapter 07 - Mortgage Markets Answers to Chapter 7 Questions 1. Mortgage markets are examined separately from bond and stock markets for several reasons. First, mortgages are backed by a specific piece of real property. If the borrower defaults on a mortgage, the financial institution can take ownership of the property. Only mortgage bonds are backed by a specific piece of property that allows the lender to take claim in the event of a default. All other corporate bonds and stocks give the holder a general claim to a borrower = s assets. Second, there is no set denomination for primary mortgages. Rather, the size of each mortgage depends on the borrower = s needs. Bonds generally have a denomination of $1,000 or a multiple of $1,000 per bond and shares of stock are generally issued in denominations of $1 per share. Third, primary mortgages generally involve a single investor (e.g., a bank or mortgage company). Bond and stock issues, on the other hand, are generally held by many (sometimes thousands of) investors. Finally, because primary mortgage borrowers are often individuals, information on these borrowers is less extensive and unaudited. Bonds and stocks are issued by publicly traded corporations which are subject to extensive rules and regulations regarding information availability and reliability. 2. Four basic categories of mortgages are issued by financial institutions: homes, multifamily dwellings, commercial, and farms. Home mortgages ($7,770.9 billion outstanding in 2004) are used to purchase one- to four-family dwellings. Multifamily dwelling mortgages ($581.6 billion outstanding) are used to finance the purchase of apartment complexes, townhouses, and condominiums. Commercial mortgages ($1,634.8 billion outstanding) are used to finance the purchase of real estate for business purposes (e.g., office buildings, shopping malls). Farm mortgages ($140.5 billion outstanding) are used to finance the purchase of farms. As seen in Figure 7-1, while all four areas have experienced tremendous growth, the historically low mortgage rates in the 1990s and early 2000s have particularly spurred growth in the single family home area (133.2 percent growth from 1994 through 2004), followed by commercial business mortgages (129.5 percent growth), and multifamily residential mortgages (117.3 percent growth). 3. A lien is a public record attached to the title of the property that gives the financial institution the right to sell the property if the mortgage borrower defaults or falls into arrears on his or her payments. The mortgage is secured by the lien. That is, until the loan is paid off, no one can buy the property and obtain clear title to it. If someone tries to purchase the property, the financial institution can file notice of the lien at the public recorder = s office to stop the transaction. 4.
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Chap007 - Chapter 07 - Mortgage Markets Answers to Chapter...

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