Question

4. The subprime mortgage market The financial crisis started with defaults-borrowers not repaying their loans-on subprime mortgages in the United States. Subprime mortgages have which of the following characteristics? Check all that apply. They have lower overall interest rates than most other mortgages. They are made to people with relatively few assets. They have a higher likelihood of default. Subprime mortgages expanded to about 35% of all mortgages issued in the United States in 2004. which of the following contributed to the growth of these mortgages? Check all that apply Banks maintaining traditional levels of leverage Decreased regulation of the financial sector A shift to lower-risk investments by investors The expectation that housing prices would keep rising On the graph, show the primary effect of a contraction of the mortgage market on the housing market. Shift the demand curve or the supply curve for housing. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther Supply Demand Supply mand QUANTITY OF HOUSING A contraction in the mortgage market would have resulted in in the price for housing.

Answer 1

1^st MCQ:

Answer: 3^rd option

The mortgage loan which is offered to the borrower having lower credit rating compare to the convention mortgage is subprime mortgage. Therefore, the chance of default is very high here. Basically, interest rate is very high in this case.

2^nd MCQ:

Answer: 4^th option

There was an increasing growth of subprime mortgage in the year 2004. It happens because of higher expectation of rising prices of houses in future; but, in reality it didn’t happened so; housing price decreased substantially which made the borrower to become defaulters.

Graph:

Since there is contraction the demand would decrease and supply would increase, causing a sharp drop in price (as shown by P1) for the same quantity Q.

Supply Demand Supply P1 Demand QUANTITY OF HOUSING

MCQ:

Answer: drop