Money Market & Short term securities Flashcards
What are some of the different types of loans?
Credit card, Mortgages & student loan
What are the different types of home loans
Home Equity Loan & HELOC (Home Equity Line Of Credit)
What is an equity line of credit?
you borrow against the available equity in your home.
And the house is used as collateral.
What is a Home Equity Loan?
Its a line of credit where you get a lump sum of cash up front. Normally up to 80% to 85% of your house’s equity.
If you default they take your house.
What is a HELOC (Home Equity Line Of Credit)?
You get a maximum amount of credit that you can use as you see fit.
What is Home equity?
it is the actual property’s current market value less any liens that are attached to that property.
What is a Lien (in context of home equity)?
a claim or legal right against assets that are typically used as collateral to satisfy a debt.
What are credit scores?
A score is calculated based on account payment history, credit utilization
used to know how risky is the creditor.
What are the different levels of credit score
There are 5 credit score levels
Deep sub-prime
Higher sub-prime
Near prime
Prime
Super prime
How do ARM (adjustable-rate mortgages) work?
They have a fixed rate for a period (Usually 2 years)
Then it enters the floating period where the interest rate can change (yearly)
What is Foreclosure?
when a borrower fails to make their mortgage payments, the bank can take the house or sell it.
How did ARM play a part in the 2008 crisis?
The floating rate can increase a lot, making sub primers default on their mortgages.
How did the housing policy incentivize the 2008 crisis?
Bush wanted everyone to have a house.
So banks had looser lending requirements for mortgages.
What is Securitization?
Repackaging Debt into a liquid asset.
aka: the process of taking an illiquid asset or group of assets (usually debt) and, through financial engineering, transforming them into marketable securities.
What are NINJA loans?
Loans given to people with
NO INCOME
NO JOB
NO ASSETS
meaning risky loans
How did interest rates influence the 2008 crisis?
they incentivized lending and on top of the housing policy it meant more mortgages were issued.
Why did banks lend to risky people (Sub-Primers)?
with rising house prices ⇒ higher equity ⇒ Risky borrower Sell or Refinance ⇒ pay back mortgage on better terms).
How did MBS’ influenced the 2008 crisis?
Because of the popularity of MBS, banks saw themselves incentivized to give even more mortgages.
What is an MBS?
Mortgage Backed Securities
They securitized mortgage loans and sold them in different trenches based on how risky the debt was.
How did credit rating agencies influence 2008 crisis?
They gave MBS’ high ratings (AAA) despite they were not that safe.
Why did rating agencies give MBS high ratings despite they didn’t deserve them?
conflict of interests
If they did not rate the MBS’ how the banks wanted, banks would go to their competitors
What is a CDO?
Collateralized Debt Obligation
Basically repackaged MBSs into new trenches that were also sold as a riskier option for higher yields.
