the 2008-2009 recession began

1. Why did housing prices rise rapidly during 2002-2005? Why did the mortgage default rate increase so sharply
during 2006 and 2007 even before the 2008-2009 recession began?

2. What happened to the credit standards (e.g., minimum down payment, mortgage loan relative to the value of the
house, and creditworthiness of the borrower) between 1995 and 2005? Why did the credit standards change? How
did this influence the housing price bubble and later the default and foreclosure rates?

3. *If owners have little or no equity in their houses, how will this influence the likelihood that they will default on
their mortgage? Why?

4. When did mortgage default and housing foreclosure rates begin to rise rapidly? When did the economy go into
recession? Was there a causal relationship between the two? Discuss.

5. *When mortgage originators sell mortgages to Fannie Mae, Freddie Mac, and investment banks the originators
have no additional liability for possible default by the borrower. How will this arrangement influence the incentive
of the originators to scrutinize the creditworthiness of the borrower? Would the incentive structure be different if the
originator planned to hold the mortgage until it was paid off? Why or why not?

6. Some charge that the Crisisof 2008 was caused by the “greed” of Wall Street firms and other bankers. Do you
agree with this view? Do you think there was more greed on Wall Street in the first five years of this century than
during the 1980s and 1990s? Why or why not?



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