PAPER 1

July 7, 2011

GOVT 490 Paper #1

The 2009 mortgage crisis resulted in a number of mortgages being delinquent or foreclosed. Most Americans purchase their homes with mortgages. With an economy in recession and a mortgage crisis media coverage shifted towards topics that are unfamiliar with most. Bank jargon and federal acronyms appeared in the mainstream media outlets that leave many pondering what it all means. To be fully aware of the crisis and the steps taken to address the issue a familiarity with the elements of the crisis is needed.

Financial institutions grants mortgages with the intent on collecting the loan back with interest thus making a profit. With a drop in market value mortgages became more expensive than the properties themselves. When a large number of people foreclosed or went delinquent the banks found themselves having property that wasn’t worth what they paid for. To address this problem and to keep the financial institutions from going under the federal government created TARP (trouble asset relief program). This program allowed the government to purchase troubled assets, allowing banks to stay afloat.

Adjustable rate mortgages are mortgages that have an interest rate that is adjusted periodically based on the market. This takes the risk from the lender onto the borrower. Banks are able to start with a low initial interest rate and then raise it. It relates to the mortgage crisis because borrowers were short minded and took advantage of low rates but then when the market dropped they were paying high interest rates.

Subprime mortgages are high interest mortgages that are issued to those with poor credit. They are related to the mortgage crisis because the borrowers were also given adjustable mortgages and when the bubble burst many were not able to pay and were foreclosed.

Investment banks are banks that are involved in the buying and selling of securities. In the crisis many the banks shortsightedness was revealed and they had to receive TARP funds to keep afloat.

CDOs are a tool that collects loans and sells it off. It gives banks the ability to sell of its debt to outside investors. As the debt moved from the initial lender regulation grew scarce.

Credit Default Swaps are insurance for the lender in case of default loans. The CDS is purchased from an insurance agent and if the loan defaults the lender will receive cash from insurance.