Money Market & Short term securities

Question 1

What are some of the different types of loans?

Answer 1

Credit card, Mortgages & student loan

Question 2

What are the different types of home loans

Answer 2

Home Equity Loan & HELOC (Home Equity Line Of Credit)

Question 3

What is an equity line of credit?

Answer 3

you borrow against the available equity in your home.

And the house is used as collateral.

Question 4

What is a Home Equity Loan?

Answer 4

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.

Question 5

What is a HELOC (Home Equity Line Of Credit)?

Answer 5

You get a maximum amount of credit that you can use as you see fit.

Question 6

What is Home equity?

Answer 6

it is the actual property’s current market value less any liens that are attached to that property.

Question 7

What is a Lien (in context of home equity)?

Answer 7

a claim or legal right against assets that are typically used as collateral to satisfy a debt.

Question 8

What are credit scores?

Answer 8

A score is calculated based on account payment history, credit utilization

used to know how risky is the creditor.

Question 9

What are the different levels of credit score

Answer 9

There are 5 credit score levels

Deep sub-prime

Higher sub-prime

Near prime

Prime

Super prime

Question 10

How do ARM (adjustable-rate mortgages) work?

Answer 10

They have a fixed rate for a period (Usually 2 years)

Then it enters the floating period where the interest rate can change (yearly)

Question 11

What is Foreclosure?

Answer 11

when a borrower fails to make their mortgage payments, the bank can take the house or sell it.

Question 12

How did ARM play a part in the 2008 crisis?

Answer 12

The floating rate can increase a lot, making sub primers default on their mortgages.

Question 13

How did the housing policy incentivize the 2008 crisis?

Answer 13

Bush wanted everyone to have a house.

So banks had looser lending requirements for mortgages.

Question 14

What is Securitization?

Answer 14

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.

Question 15

What are NINJA loans?

Answer 15

Loans given to people with
NO INCOME
NO JOB
NO ASSETS

meaning risky loans

Question 16

How did interest rates influence the 2008 crisis?

Answer 16

they incentivized lending and on top of the housing policy it meant more mortgages were issued.

Question 17

Why did banks lend to risky people (Sub-Primers)?

Answer 17

with rising house prices ⇒ higher equity ⇒ Risky borrower Sell or Refinance ⇒ pay back mortgage on better terms).

Question 18

How did MBS’ influenced the 2008 crisis?

Answer 18

Because of the popularity of MBS, banks saw themselves incentivized to give even more mortgages.

Question 19

What is an MBS?

Answer 19

Mortgage Backed Securities

They securitized mortgage loans and sold them in different trenches based on how risky the debt was.

Question 20

How did credit rating agencies influence 2008 crisis?

Answer 20

They gave MBS’ high ratings (AAA) despite they were not that safe.

Question 21

Why did rating agencies give MBS high ratings despite they didn’t deserve them?

Answer 21

conflict of interests

If they did not rate the MBS’ how the banks wanted, banks would go to their competitors

Question 22

What is a CDO?

Answer 22

Collateralized Debt Obligation

Basically repackaged MBSs into new trenches that were also sold as a riskier option for higher yields.