Term
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Definition
-Weak institutions
-Botched Planning
-Failed Relief Execution
-Political Infighting Hampering Relief
--result: tremendous, unnecessary human/econ costs |
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Term
| Prime Lending (How to buy a house the old fashioned way) |
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Definition
-Credit risk
-Lending characteristics
-Consumer is buying a loan product
-Consumer needs must fit into the lending product box |
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Term
| Fixed Rate Mortgage (FRM) |
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Definition
Commonly 30 yr. fixed interest
Typical Federal housing association loan (FHA)
Good credit rating
Max 200,000 loan
7% interest
2.25% down payment - 5,000
No prepayment fees
Much paper work
1% loan orgination fee (mort. broker salary) |
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Term
| Home Owners Loan Corporation (HOLC) |
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Definition
Formed by the fed government
-help w/depression defaults
-gov't sells treasury bills to refinance mortgages
Buys defaulted mortgages
Refinanced Mortgages
Creates new loans and payment schedules
-refinanced over 1 million homes in 3 years |
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Term
| Fannie Mae and Freddie Mac |
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Definition
Fannie Mae created to buy mortgages, made sure that morrgage money was available for people to buy normal houses (gov't entity)
issued/sold stock
lent money to ppl who had homes as collateral
changed terms on mortgages and adjustable rate mortgages
Freddie Mac competed with Fannie Mae
gov't took over Fannie Mae |
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Term
| Origins of Fannie Mae and Freddie Mac |
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Definition
FM-monopoly
Caps on mortgage size raised to keep up with increatses in US house prices
2007-Fannie and Freddie back 5 trillion dollars.
Fannie and Freddie debt is insured by the government, investors hold it much like a US Treasury bill all of the world |
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Term
| Adjustable Rate Mortgages (ARMS) |
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Definition
Loan interest rate is fixed for a specified time
Loan interest rate resets periodically (3yr most common)
-Reset occors according to reference interest rate
-Reference is usually the US Treasury Bill
-Example: at a reset date new interest rate=ref rate+redetermined spread (with caps/floors) and the rate cannot go up/down more than x% every 3 years |
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Term
| Why buy a loan with an ARM? |
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Definition
| A 3 yr. ARM is cheaper than a 30yr fixed contract if interest rate change both benefit/hurt |
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Term
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Definition
| "30 due in 5" make payments as if you had a thirty year mortgage but the remaining principal (balloon) is due after five years. If you don't get a new loan in 5 yrs, you have to sell the house...Different from ARM since there is no agreement that the lender will carry the loan in the future |
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Term
| "Interest only" Mortgages |
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Definition
Home owner never actually pays down the loan.
The home owner makes only interest payments, but never gains equity in the home. |
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Term
| Why do people do interest only mortgages? |
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Definition
People do this because...
Hope income increase and then refinance into a different loan. Hope housing prices rise, so when the house is sold you can make money since the amount owed is lower than the sales price.
Buy a larger hous than you can afford. |
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Term
| "Negative Amortization" Mortgages |
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Definition
| MOnthly loan payment is less than the interest charged. So the outstanding loan balance owed increases over time. The "home owner" never payes down the loan and never actually pays the full interest. The missing interest payment is added to the amount owed. |
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Term
| Why would anyone do a negative amortization mortgage? |
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Definition
HOpe income increases and then refinance into a different loan. HOpe housing prices rise, so when the house is sold you can make money since the amount owed is lower than the sales prices.
Buy a larger house than you can really afford. |
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Term
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Definition
| Designed for homebuyers with poor or No credit and income history. Higher interest rates reflect the risk premium. High loan origination charges (because market was unregulated). Generated incentives to offer subprime loans first. Any amount (higher rate than FHA), Arms (usually 2-3 years at fixed rate) |
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Term
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Definition
| No Income No Asset verification loans (subprime loan) Designed for homebuyers with poor or no credit and income history. |
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Term
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Definition
Ultra low interest rates.
Very short periods of time (one year).
Usually with prepayment penalty. |
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Term
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Definition
| 52% of subprime mortgages originated by lenders with no federal supervision. State regulations were poorly enforced by state agencies that were sparsely staffed. US Gov Accounting office suggest "concerns about non bank lenders." Some have been targets of some of the most notable fed and state enforcement actions involving abusive lending. |
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Term
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Definition
| Subprime opened market to many unserved homebuyers. Allowed consumers with credit issues to become and remain homeowners. Neither the lender or the borrower have been properly regulated. |
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Term
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Definition
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Term
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Definition
| Speculative, deteriorating situation expected |
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Term
Standard and Poor's (S&P)
Moody's |
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Definition
| Credit rating agencies assess Mortgage back security. Evaluate and report the risk involved with various investment alternatives. Assign credit rating (AAA, AAB, ABB) |
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Term
| Credit Rating Moral Hazard |
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Definition
Credit Rating agencies want the business (go get paid to provide a rating)
Lenders that create and package MBS pay credit rating agencies for the rating. (of course the compeanies want the best rating to get the higest price of their MBS package. Lenders "shop" their package to different Credit agencies. Credit agency gives preliminary report. The credit agency that assigns the higher credit score gets the business. Incentive to inflate the score is great. |
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Term
| Root Cause of Credit Rating Hazard |
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Definition
| No one would have bought MBS if they had been properly rated. AAA rating for packages that contained substantial suprime default risk. If no one had bought those packages, the subprime loans could not have been sold. If the subprime loans could not have been sold, the loan product could not have been offered to desperate homebuyers. |
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Term
| Who supervises Credit Rating Agencies |
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Definition
| SEC- US Security and and Exchange commission proposed far reaching rules designed to address perceived conflicts of interest between rating agencies and issuers of structured securities. Rating agencies have lowered the credit ratings on 1.9 trillion mortgage backed securities from 2007 to 2008. |
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Term
| Who is affected by false credit ratings? |
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Definition
| Homeowners who are offered a product that should not be sold. (foreclosures). Banks that hold MBS that are riskier than expected. (WAMU seized, Wachovia seized). MOrtgage packages are insured against default. The cost of insurance depends on the credi risk. INsurance companies insured the MBS now find out their premiums were too low on the risk. (AIG seized taxpayer cost 85 billion) |
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Term
| What is the role of government? |
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Definition
| Stabilization: monetary and fiscal policy used to control unemployment and inflation. To provide institutions that are the foundation to our economic system (patent system, education, IRS, etc.) |
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Term
| Local Government Responsibility |
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Definition
Provides goods produced under natural monopoly condtions. Provides goes that generate positive exernalities( brides/education)Provides public goods.
---Primarily fills third role. Does not have the responsibility of fiscal stabilization. Does not have a responsibility to provide institutions. |
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Term
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Definition
| Represent a "market failure." Person's consumption/production of a good creates benefits or costs for other (ie. education, tacoma's polluting Aluminum Smelters.Person/ Firm make efficient decision (until MB=MC) but externality imposes a social cost or benefit that is not considered. So the private provision of pollution/education is socially inefficient. |
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Term
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Definition
| Where production of a good subject involves economies of scale, large fixed costs. Private firms under provide because high scale economies mean that average cost is greater than marginal cost. |
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Term
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Definition
| Government provides certain service or good because the market cannot price it, charge, or exclude it. Example: Permitting, planning, inspection. |
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Term
| Methods for determining amount of local public good |
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Definition
| Benefits of usage taxation, Median Voter |
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Term
| Six Major Land Use Issues |
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Definition
| 1) Housing affordability 2) Traffic congestion 3) Housing choices 4) Eco-system Services 5) Sprawl, fragmentation 6) Where to direct future housing growth? |
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