14-1: Influences on the Mortgage Market

A settlement system used for financial transactions by US commercial lenders; a nationwide network to exchange paperless payments among financial institutions and government agencies.

Automated Clearing house (ACH)

A process whereby regulatory restraints are gradually relaxed.

Deregulation

The interest rate charged by Federal Reserve Banks on loans to member commercial banks.

Discount Rate

When depositors bypass traditional depository institutions and invest directly in the stock market, mutual funds, artwork, etc., thereby reducing the mortgage money supply and causing interest rates to rise.

Disintermediation

The flow of deposits into lending institutions that creates a mortgage money supply.

Intermediation

A bundle of mortgage loans that lenders sell to investors who receive a share of the principal and interest collected from borrowers every month.

Mortgage-Backed Securities

Actions taken by the Federal Reserve to influence the availability and cost of money and credit as a means of promoting national economic goals.

Monetary Policy

The use of persuasive influences rather than coercion or regulation to encourage changes in the public and financial markets.

Moral Suasion

When the Federal Reserve Board sells or buys government securities (or US dollars) as a means of controlling supply and demand and confidence in those items.

Open Market Operations

The interest rate a bank charges its most creditworthy customers.

Prime Rate

The percentage of customers' deposits that commercial banks are required to keep on deposit, either on hand at the bank or in the bank's own accounts; in other words, money the bank cannot lend to other people.

Reserve Requirement

Home sales prices tend to rise when interest rates ______.

Drop

TRUE or FALSE: Intermediation increases the amount of money banks have to lend, which tends to lower interest rates.

TRUE: The flow of funds into deposits held by primary lenders that increase the mortgage money supply is referred to as intermediation.

This Act created the Federal Reserve System and established a federal charter for banks to make real estate loans. Although these early loans were initially the short-term, high down payment loans we just discussed, the Act created a framework for government involvement in mortgage lending, which paved the way for future changes.

Federal Reserve Act of 1913

The nation’s central bank. Its primary purpose is to:

• Regulate the flow of money, credit, and interest rates through its member banks by controlling reserve requirements and the discount rate and through its open market erations.

• Promote stable economic growth.

The Federal Reserve (the Fed)

The Federal Reserve has a network of ___ Federal Reserve Banks (FRBs) located in major cities throughout the United States that carry out day-to-day operations of the Federal Reserve System.

12

Provides links among financial institutions and government agencies that allows for the digital transfer of funds between accounts or banks.

Funds Transfer

The primary responsibility of the Federal Reserve System Board of Governors is to formulate the nation’s ______ _______.

Monetary Policy

Name the 4 tools the Federal Reserve uses to minimize risk in the banking system.

Discount Rates, Open Market Operations, Reserve Requirements, Moral Suasion

Through its ______ _____, the Federal Reserve lends money to banks so that a shortage of reserve funds at one institution does not disrupt the flow of money and credit throughout the entire banking system.

discount window

_____ reserve requirements decreases the amount of money in circulation and, thus, the amount of money available to make loans. Less money for loans causes an increase in interest rates while borrowing and spending decrease.

Increasing

_ the reserve requirements and making more money available for loans, the Federal Reserve can stimulate a sluggish market by increasing the amount of money in circulation, which causes interest rates to decrease and borrowing and spending to increase.

Decreasing

The most important monetary policy-making body of the Federal Reserve System.

Federal Open Market Committee (FOMC)

TRUE or FALSE: To stimulate or expand the economy, the Federal Reserve will buy government securities from the public.

TRUE: Selling securities on the open market increases the money supply, making more money available to lend. This tends to lower interest rates. If the FOMC wanted to slow the economy instead, the Federal Reserve would sell government securities to the public. This tends to create a tight money market and increase interest rates.

The National Housing Act of 1934 created the _____ to help the housing industry recover from the Great Depression.

Federal Housing Administration (FHA)

TRUE or FALSE: The Federal Housing Administration was created to make loans to low-income borrowers.

FALSE: The FHA was not set up to fund loans. Instead, it provides mortgage insurance to reduce the risk of loss by banks if the borrower defaults on a loan.

An alternative financing tool intended to help borrowers with a poor credit history, higher debt, lower income, previous bankruptcy, short employment history, or other unfavorable financing characteristics to reach their goal of homeownership.

Subprime Loans

Misrepresentation or concealment in an attempt to obtain a mortgage loan.

Mortgage Fraud

TRUE or FALSE: The availability of new loan programs with relaxed qualifying standards was a contributing factor to the mortgage crisis of 2007.

TRUE: To make more and more residential loans, lenders created many new loan programs. And some of them had relaxed qualifying standards, such as requiring little or no income or asset verification, not considering a borrower’s ability to repay the loan, not requiring an appraisal to verify the property value, requiring a minimal or no down payment, and allowing borrowers to avoid mortgage insurance.