UCLA ECON 103 - Chap005 (1) (12 pages)

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Chap005 (1)



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Chap005 (1)

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Pages:
12
School:
University of California, Los Angeles
Course:
Econ 103 - Introduction to Econometrics

Unformatted text preview:

Chapter 05 Adjustable and Floating Rate Mortgage Loans Solutions to Questions Chapter 5 Adjustable and Floating Rate Mortgage Loans Question 5 1 In the previous chapter significant problems regarding the ability of borrowers to meet mortgage payments and the evolution of fixed interest rate mortgages with various payment patterns were discussed Why didn t this evolution address problems faced by lenders What have lenders done in recent years to overcome these problems These inadequacies stem from the fact that although payment patterns can be altered to suit borrowers as expectations change the CAM CPM and GPM are all originated in fixed interest rates and all have predetermined payment patterns Neither the interest rate nor the payment patterns will change regardless of economic conditions A variety of mortgages are now made with either adjustable interest rates or with variable payment provisions that change with economic conditions Question 5 2 How do inflationary expectations influence interest rates on mortgage loans Most savings institutions had been making constant payment mortgage loans with relatively long maturities and the yields on those mortgages did not keep pace with the cost of deposits These problems prompted savings institutions lenders to change the mortgage instruments to now make more mortgages with adjustable interest rate features that will allow adjustments in both interest rates and payments so that the yields on mortgage assets will change in relation to the cost of deposits Question 5 3 How does the price level adjusted mortgage PLAM address the problem of uncertainty in inflationary expectations What are some of the practical limitations in implementing a PLAM program One concept that has been discussed as a remedy to the imbalance problems for savings institutions is the price level adjusted mortgage PLAM To help reduce interest rate risk or the uncertainty of inflation and its effect on interest rates it has been suggested that lenders



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