Subprime Mortgage Crisis Flashcards
7 cards from real Mortgage practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Subprime Mortgage Crisis flashcards as text
What is 'negative amortization' and how did it contribute to the subprime mortgage crisis?
Answer: Loan balances grow when payments don't cover accruing interest, leaving borrowers deeper in debt
Negative amortization loans allowed minimum payments below the interest due, causing loan balances to increase and borrowers to owe more than the home's value when prices dropped.
What was the Emergency Economic Stabilization Act of 2008 primarily designed to do?
Answer: Authorize the Treasury to purchase toxic mortgage assets through the TARP program
The Emergency Economic Stabilization Act created the $700 billion Troubled Asset Relief Program (TARP), giving the Treasury authority to buy distressed mortgage-backed securities.
How did collateralized debt obligation (CDO) squared products increase systemic risk during the subprime crisis?
Answer: They repackaged existing CDO tranches into new securities, obscuring underlying mortgage risk
CDO-squared products pooled lower-rated CDO tranches into new securities, creating extreme complexity that masked the true concentration of subprime mortgage exposure.
What does the term 'underwater mortgage' mean, as commonly used during the subprime crisis?
Answer: The outstanding loan balance exceeds the current market value of the home
An underwater (or 'upside-down') mortgage means the borrower owes more than the home is worth, eliminating equity and making refinancing or selling at a profit impossible.
Which rating agency practice most directly contributed to inflated ratings on subprime mortgage-backed securities?
Answer: The issuer-pays model, where securities issuers paid rating agencies for ratings
The issuer-pays model created conflicts of interest because Moody's, S&P, and Fitch competed for business from the very banks whose products they rated, incentivizing favorable ratings.
What is 'predatory lending' in the mortgage context, as highlighted by the subprime crisis?
Answer: Imposing unfair or abusive loan terms on borrowers, often targeting vulnerable populations
Predatory lending involves deceptive or exploitative practices—such as excessive fees, loan flipping, and balloon payments—often targeting elderly, minority, or financially unsophisticated borrowers.
What effect did the subprime mortgage crisis have on the broader U.S. economy, as classified by the NBER?
Answer: It triggered the Great Recession, which officially lasted from December 2007 to June 2009
The National Bureau of Economic Research (NBER) dated the Great Recession from December 2007 to June 2009, making it the longest U.S. recession since World War II.