In today's economic recession, it has become important to recognise how we have reached this point. A major cause contributing to this is the stock market downturn in the summer of 2007. This resulted from many cause, a major of which was a series of complex issues revolving around home mortgages and credit. Better understanding these issues may help prevent this as a cause of economic problems in the future.

What Is a Mortgage

A mortgage is a way to use property as security for the payment of a debt. This is the most common way to borrow money to pay for your house. The Federal Reserve is in charge of the amount of money a bank can use to make loans, which also affects the interest rates. The Fed member banks are allowed to borrow money from the district reserve banks to expand their lending power. These district banks charge an interest rate that directly affects the interest rates given on loans to individuals, like mortgages loans. In short, the Fed has a lot of power over the interest rates on most loans.

Mortgage Market

There are two mortgage markets: the Primary Mortgage Market and the Secondary Mortgage Market. The Primary consists of the lenders that originate mortgage loans. They make money available directly to borrowers. For the lender, income is generated from finance charges collected at closing and recurring income, or the interest collected during the term of the loan. These loans are normally safer because dealing directly cuts out a lot of confusion and middlemen. The lenders are also more careful to check their borrower’s credit history and income. The Secondary Market is where things can get more risky. Lenders in this market sell their loans to avoid interest rate risks and to raise capital to continue making mortgage loans. It also gives them a faster profit. The investor who bought the loan then receives the payments from the borrower instead.