Financial Markets and Institutions (2-downloads)

p. 328

reserve accounts, p. 334

securitized mortgages, p. 336

subprime loans, p. 338

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Chapter 14 The Mortgage Markets

341

Q U E S T I O N S

1. What distinguishes the mortgage markets from other

capital markets?

2. Most mortgage loans once had balloon payments; now

most current mortgage loans fully amortize. What is

the difference between a balloon loan and an amor-

tizing loan?

3. What features contribute to keeping long-term mort-

gage interest rates low?

4. What are discount points, and why do some mortgage

borrowers choose to pay them?

5. What is a lien, and when is it used in mortgage lending?

6. What is the purpose of requiring that a borrower

make a down payment before receiving a loan?

7. What kind of insurance do lenders usually require 

of borrowers who have less than an 80% loan-to-

value ratio?

8. Lenders tend not to be as flexible about the qualifi-

cations required of mortgage customers as they can

be for other types of bank loans. Why is this so?

9. Distinguish between conventional mortgage loans and

insured mortgage loans.

10. Interpret what is meant when a lender quotes the

terms on a loan as “floating with the T-bill plus 2 with

caps of 2 and 6.”

11. The monthly payments on both graduated-payment

loans and growing-equity loans increase over time.

Despite this similarity, the two types of loans have dif-

ferent purposes. What is the motivation behind each

type of loan?

12. Many banks offer lines of credit that are secured by

a second mortgage (or lien) on real property. These

loans have been very popular among bank customers.

Why are homeowners so willing to pledge their homes

as security for these lines of credit?

13. The reverse annuity mortgage (RAM) allows retired

people to live off the equity they have in their

homes without having to sell the home. Explain how

a RAM works.