Question

Answer the following questions a. Why is refinancing at a lower interest rate or paying off a mortgage costly for mortgage traders? b. How did bond traders make money? c. explain the beginnings of the mortgage market to what you know about the meltdown that happened in 2008.

Answer 1

a. The process of refinancing in whereby the individual who takes the mortgage takes another loan to pay off their existing mortgage. The rates of interest on the other loan is usually lower than the one for the mortgage reducing the burden of the extra interest that is to be paid on top of the mortgage on a monthly basis.

Explanation:

Mortgage providers experience a loss when customers refinance. The main reason being that each month the mortgage provider reaps the benefits as interest as long as the contract is still in place. If it is a type of non-fixed mortgage then the traders lose their chance of adjusting the interest rates to their favor when markets allow. The monthly interest rates on mortgages are the main source of motivation for mortgage traders. When a customer refinances, they are the only one that benefits. Lower interest rates

b. Traders of bonds have agents and brokers who help oversee the trends of the market. Once there is a standard market price person are allowed to trade their bonds. When the prices of bonds go up, the trader makes more money. One buys a bond at a fee then once the market prices rise, they sell it to buyers or brokers on behalf of clients who want to purchase the bond.

c. When it started in the 1880s, before it was legitimized in 1994, there were strict guidelines that helped in proper service operations between consumers and lenders. The system required that the credit scores and financial history of the borrower be a primary determinant of whether an individual is to get the mortgage. In the early 2000s these rules and laws were being ignored by some institutions most of which were private. Giving mortgage to subprime clients and not following proper protocols led to an enlarged number of mortgage defaulters leading to the crisis in 2008.