Financial Markets and Institutions (2-downloads)

Part of the classic American dream is to own one’s own home. With the price of

the average house now over $235,000, few of us could hope to do this until

late in life if we were not able to borrow the bulk of the purchase price.

Similarly, businesses rely on borrowed capital far more than on equity invest-

ment to finance their growth. Many small firms do not have access to the bond

market and must find alternative sources of funds. Consider the state of the

mortgage loan markets 100 years ago. They were organized mostly to accom-

modate the needs of businesses and the very wealthy. Much has changed since

then. The purpose of this chapter is to discuss these changes.

Chapter 11 discussed the 

money markets, the markets for short-term

funds. Chapters 12 and 13 discussed the 

bond and stock markets. This chapter

discusses the 

mortgage markets, where borrowers—individuals, businesses,

and governments—can obtain long-term collateralized loans. From one per-

spective, the mortgage markets form a subcategory of the capital markets

because mortgages involve long-term funds. But the mortgage markets differ

from the stock and bond markets in important ways. First, the usual borrowers

in the capital markets are government entities and businesses, whereas the

usual borrowers in the mortgage markets are individuals. Second, mortgage

loans are made for varying amounts and maturities, depending on the borrow-

ers’ needs, features that cause problems for developing a secondary market.

In this chapter we will identify the characteristics of typical residential mort-

gages, discuss the usual terms and types of mortgages available, and review

who provides and services these loans. We will also continue the discussion of

issues in the mortgage-backed security market and the recent crash of the

subprime mortgage market begun in Chapter 8.