Unformatted text preview: property Teaser Rate first 2years Margin of 5% or more Some loans were negative amortization. Financial Instability Hypothesis
Financial Instability Hypothesis Stable Economic Times Investors take risk because they anticipate continued stability. Behavior leads to future instability: 3stages of economic progress 3stages of Economic Progress
3stages of Economic Progress
1. Hedge Stage: Investors have $ from income to invest Invest safely purchasing a home. 2..
2 Speculative Stage: Riskier behavior Interest only borrowing with balloon payments. Investors expect:
• Continued economic growth • Asset values not to decline • Interest rates to remain stable 3..
3 Ponzi Unit: Speculation phase Investors expect property values to continue rising. Negative amortization loans Key Economic Variables
Key Economic Variables Gross domestic product Unemployment rates interest rates & inflation Budget Deficits Consumer sentiment Demand and supply shock
Demand and supply shock
Demand shock An event that affects demand for g...
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