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Chapter 26: Problem 1

What is a mortgage? What were the important developments in the mortgage market during the years after \(1970 ?\)

Short Answer

Expert verified
A mortgage is a loan typically used to purchase real estate, with the property itself serving as collateral. After 1970, the mortgage market saw significant developments, such as the introduction of Adjustable-Rate Mortgages, the passage of the Equal Credit Opportunity Act, and the rise of the secondary mortgage market.

Step by step solution

01

Define Mortgage

A mortgage is a type of loan specifically linked to real estate. This is typically a long-term loan that a borrower undertakes to purchase a property, with the property itself serving as collateral for the loan.
02

Discuss Developments in Mortgage Types

The introduction of Adjustable-Rate Mortgages (ARM) after 1970 was a significant development. With ARM, interest rates fluctuate over the life of the loan. This was a departure from traditional Fixed-Rate Mortgages, where interest rates remain constant.
03

Discuss Developments in Mortgage Regulation

Post-1970, there were significant changes in mortgage market regulations. Notably, the passage of the Equal Credit Opportunity Act in 1974 prohibited credit discrimination on the basis of race, color, religion, national origin, sex, marital status, or age.
04

Discuss Developments in Mortgage Funding

Another major development was the rise of the secondary mortgage market. This is where existing mortgages are bundled together and sold to investors as mortgage-backed securities. This greatly increased the liquidity of mortgages and expanded the ability of banks to issue more loans.

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Most popular questions from this chapter

What is a monetary rule, as opposed to a monetary policy? What monetary rule would Milton Friedman have liked the Fed to follow? Why has support for a monetary rule of the kind Friedman advocated declined since \(1980 ?\)

A column in the Wall Street journal referred to policy actions aimed at "fulfilling both sides of the Fed's dual mandate." a. Who gave the Fed a dual mandate? b. Does the Fed's dual mandate require it to attain a zero percent unemployment rate? Briefly explain. c. Does the Fed's dual mandate require it to attain a zero percent inflation rate? Briefly explain.

(Related to the Apply the Concept on page 916 ) The following is from a Federal Reserve publication: In practice, monetary policymakers do not have up-to-the-minute, reliable information about the state of the economy and prices. Information is limited because of lags in the publication of data. Also, policymakers have less-than- perfect understanding of the way the economy works, including the knowledge of when and to what extent policy actions will affect aggregate demand. The operation of the economy changes over time, and with it the response of the economy to policy measures. These limitations add to uncertainties in the policy process and make determining the appropriate setting of monetary policy ... more difficult. If the Fed itself admits that there are many obstacles in the way of effective monetary policy, why does it still engage in active monetary policy rather than use a monetary growth rule, as suggested by Milton Friedman and his followers?

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