similarly businesses rely on borrowed capital far more than on equity investment to 638284

Part of the classic American dream is to own one”s own home. With the price of the average house now over $235,000, few of us could hope to do this until late in life if we were not able to borrow the bulk of the purchase price. Similarly, businesses rely on borrowed capital far more than on equity investment to finance their growth. Many small firms do not have access to the bond market and must find alternative sources of funds. Consider the state of the mortgage loan markets 100 years ago. They were organized mostly to accommodate the needs of businesses and the very wealthy. Much has changed since then. The purpose of this chapter is to discuss these changes. Chapter 11 discussed the money markets, the markets for short term funds. Chapters 12 and 13 discussed the bond and stock markets. This chapter discusses the mortgage markets, where borrowers—individuals, businesses, and governments—can obtain long term collateralized loans. From one perspective, the mortgage markets form a subcategory of the capital markets because mortgages involve long term funds. But the mortgage markets differ from the stock and bond markets in important ways. First, the usual borrowers in the capital markets are government entities and businesses, whereas the usual borrowers in the mortgage markets are individuals. Second, mortgage loans are made for varying amounts and maturities, depending on the borrowers” needs, features that cause problems for developing a secondary market. In this chapter we will identify the characteristics of typical residential mortgages, discuss the usual terms and types of mortgages available, and review who provides and services these loans. We will also continue the discussion of issues in the mortgage backed security market and the recent crash of the subprime mortgage market begun in Chapter 8.