The subprime crisis and the credit crunch MK, Unit 14

Match up the terms and definitions mortgage down payment credit rating collateral default foreclosure (to foreclose) bubble failure to repay a loan a partial payment made at the time of purchase, with the balance to be paid later. a loan secured by the collateral of a real estate property a process that transfers the right of home ownership from the homeowner to the bank or lender. This happens when the owner defaults on his mortgage loan payments. A situation in which prices of some asset(s) rise far above their actual value. property or other assets used as a guarantee of payment estimates of people’s ability to fulfil their financial commitments

Solutions: mortgage down payment credit rating collateral default foreclosure (to foreclose) bubble a loan secured by the collateral of a real estate property a partial payment made at the time of purchase, with the balance to be paid later. estimates of people’s ability to fulfil their financial commitments property or other assets used as a guarantee of payment failure to repay a loan a process that transfers the right of home ownership from the homeowner to the bank or lender. This happens when the owner defaults on his mortgage loan payments. A situation in which prices of some asset(s) rise far above their actual value.

Video – Watch this at home too!!! Watch and answer the questions Why did institutional investors look for new investment opportunities in the early 2000s? What are collateralized debt obligations? What is the difference between prime and subprime borrowers? How are prices of all houses affected when a significant portion of homeowners default on their mortgage?

RB, p. 80/III 1. G 2. B 3. C 4. E 5. D 6. A 7. F

Practice: MK, p. 75 Before reading explain these terms: financial assets cash flow securities to write off a bad debt When banks realize that a debt will never be repaid and stop trying to collect it

Practice: What are these? Find the corresponding term in the reading. (MK, p. 75) People who are unlikely to repay their loan. – subprime borrowers /people with a high risk of default A security, that an investor would buy because (s)he wants to get a regular income from people who are paying off the mortgage on their houses. – MBS and CDO The property is worth less than the loan value. – the debt is greater than the value of the house

Practice: Find definitions for these terms in the text Subprime borrowers Default Securitization Credit crunch