Friday, March 23, 2007

Problems in the Subprime Market


Subprime Mortgage Woes Are Likely to Spread
by Phil Izzo
Mar 16, 2007
Page: A4

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TOPICS: Housing
SUMMARY: This article reports the results of a new survey of economic forecasters. Most forecasters who participated in the survey believe that turmoil in the subprime mortgage market is likely to spread to the broader mortgage market. The forecasters think the U.S. will avoid a recession and a significant rise in unemployment. The forecasters also believe that the worst of the housing bust is behind us. The teaser rates on sub-prime mortgages tend to expire sooner than the teaser rates on prime mortgages so the sub-prime market will be hit with higher mortgage payments first. But once the teaser rates expire in the prime market, there might be some difficulties in that market as well. The overall impact of these mortgages may be small. Only 10% of all mortgages are adjustable rate mortgages. Some economists blame the Fed for keeping interest rates too low for too long, which led to a possible over stimulation of the housing market.
1.) What is the subprime mortgage market? Why is it in trouble?

2.) How might the problems in the subprime mortgage market spill over to the rest of the economy?

3.) What is the difference between an adjustable rate mortgage and a conventional mortgage? What are the costs and benefits of each?

4.) How might the Fed have contributed to the problems in the subprime mortgage market?

5.) According to most of the forecasters surveyed, is the U.S. economy headed for recession?
Reviewed By: Edward Gamber, Lafayette College

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