Week 2 Flashcards
Have housing bubbles been important in the in the last crises?
Yes.
How many major crises have happened since WW2
5
Which was the first major cris since WW2?
Spain
When was the crisis in Norwy?
1987 (fog)
When were the crises in Finland and Sweden?
1991 (but)
When was the big crisis in Japan ?
1992 (bunny)
What do these crises have in common?
A rise in housing prices.
How much do housing prices acrtually rise before one of the major crises?
for 4 years
What about housing prices in tye last 100 years ?
They have been really flat.
Where do teyh returns for houses come from?
Mostly from the people living in these houses.
What are morgages?
The loans that people make to get houses.
What time does a standard morgage in the USA hve?
30 years.
What interest rate does a standard loan in the US have?
Fixed interest rates.
What is the name of an alternative to a normal morgage?
an adjustable rate morgage, or ARM
What is an adjustablke rate morgage?
So it could be adjustable right from the beginning. So your interest rate will be pegged to some other interest rate that’s in the market. Most commonly the London Interbank Offered Rate, the LIBOR. You would pay an amount relative to that.
What is more common for an adjustable interest rate?
More common though is to have a rate that’s fixed for some portion of the loan and then begins to float. By doing that, you will get a lower rate in the early years of the loan, but you’re taking some risk that the rate will increase in the later years of the loan.
What does a 5/25 morgage mean?
So for example, a 5/25, sometimes just called 5/1, so 5/25 would mean it’s fixed for five years, and then floating or adjustable for 25 years.
What woule be the difference in payment?
You would pay mabre 3.5% instead of 5 % butthen it would adjust.
When would it really makje sense to use an adjustable interest rate?
When qwou know you willl be selling the house in the next 5 years.
What are reallz common adjustable interest rates?
3/27, 2/28, 5/25, 7/23
Can the rate sometimes be even below the rate the mraket wants us to do?
Yes, it can.
Why would lenders do that?
We would do that if when you refinance the loan, if you choose to refinance the loan after five years, you have to pay us a little bit of a penalty.
What happens with such a teaser rate after 5 years?
Or, if after five years, when you refinance, the rate that you’ll have to pay relative to whatever the reference rate is, has a bigger spread. So for example in the three and a half percent case for a five 5/25 mortgage, you might then pay let’s say 100 basis points which is 1% over the LIBOR rate. If I give you a teaser rate, perhaps you have to pay 200 basis points above the LIBOR rate when there is an adjustment.
What about teaser rates in the United States?
They were really popular outside the United States and became more and more popular in the
What are other forms of very flexible morgage structures?
You can add in extra things. For example, negative amortization loans. Enable you in the early years of the mortgage, instead of paying off small piece of the mortgage, to actually be increasing the size of the mortgage. So, your payment is much lower in the first few years. This is similar to a teaser rate. What the lender would get in return is either the ability to charge you more in the later years of the mortgage, or to get some payment made to them, if you refinance before you have to make those larger payments
What is a big ballon payment?
A large payment after some part of the loan. So instead of paying off, say, approximately 1% of the principal every year for the first five years, you might make one payment of 5% of the principal after 5 years
By which names do prime morgages also go?
conforming or agency morgages.
What are prime morgages?
And that matters because what makes a mortgage prime is that it conforms, that it conforms to the standards that are set by the government-sponsored enterprises.
