What do we call a situation when a person can no longer pay their mortgage? What is the definition of this concept?
Default – when a debtor is unable to meet the legal obligations of debt repayment.
10
Why was it hard to take a loan out originally?
Because lenders didn’t want to take the risk of a person with bad credit or unsustainable job “defaulting” on the loan.
10
At which time period were more citizens (with or without bad credit) able to take out loans?
In the 2000s
5
Why did investors in the USA and abroad decide to throw their money at the US housing market?
Because they thought they would get a better return from the interest rates home owners paid on mortgages, because they were higher.
15
What did big money, global investors do instead of tackling with individual mortgages?
They bought investments called mortgage-backed securities that are created when large financial institutions securitize mortgages.
20
Why did investors think that throwing their money at the US housing market is a safe bet?
Because home prices were going up and lenders thought, worst case scenario, the borrower defaults on the mortgage, they can sell the house for a higher price.
20
Why did lenders loosen their standards and started giving loans to people with low income and poor credit?
Because investors were desperate to buy more securitized mortgages, thus lenders had to make more mortgages; they did that by loosening the mortgage standards.
15
What is a ‘sub-prime mortgage’?
A mortgage that is given to people with poor credit histories.
10
What is a predatory lending practice?
It is a practice that loaners used to generate more mortgages. They made loans w/o verifying income and offered absurd, adjustable mortgage rates
25
What was the cause behind people believing that mortgage backed securities and CDOs are a good idea?
New lax lending requirements and low interest rates that drove house prices higher.
15
What were the consequences of the financial crisis?
Trading and the credit markets froze, the stock market crashed, the US economy suddenly found itself in a disastrous recession.
20
What is a Dodd-Frank law?
This law took steps to increase transparency and prevent banks from taking on so much risk.
20
What is a ‘perverse incentive’?
It’s when a policy ends up having a negative effect, opposite to what is intended.
25
What is ‘moral hazard’?
When one person takes on more risk, because another person bears the burden of that risk.
25
What phrase is a great example of a moral hazard?
Too big to fail. If banks know that they are going to be bailed out by the government, they have an incentive to make risky and unwise choices.
25
What is the securitizing of mortgages?
The process of taking illiquid assets and turning them into security.
