Questions for economic reasoning and discussion

1.What distinguishes the mortgage markets from other capital markets?

2.What features contribute to keeping long-term mortgage interest rates low?

3.During the 2007 – 2009 recession, many people who had taken out mortgages to buy homes found that they were having trouble making the payments on their mortgage. Because housing prices were falling, many found that the amount they owed on their mortgage was greater than the price of their home. Significant number of people defaulted on their mortgages. The following appeared in an article discussing this issue in the Economist magazine: Since foreclosures are costly for lenders as well as painful for borrowers, both sides could be better off by renegotiating a mortgage. The sticking point, according to conventional wisdom, is securitization. When mortgages are sliced into numerous pieces it is far harder to get lenders to agree on changing their terms. Why might both lenders and borrowers be better off as a result of renegotiating a mortgage? How does securitization result in mortgages being “sliced into numerous pieces”? Why would securitization make renegotiating a loan more difficult? How would theses difficulties effect the services that securitization provides to savers and borrowers?

4.What is the purpose of requiring that a borrower make a down payment before receiving a loan?

5.Lenders tend not to be as flexible about the qualifications required of mortgage customers as they can be for other types of bank loans. Why is this so?

Supplementary tasks

Task 1. A. Scan the text.

Mortgage Arrears Reduce Building Society Profits

1. The growth in building society profits for this financial year is expected to be restrained due to a sharp increase in the number of buy-to-let property owners going into mortgage arrears.

2. However, the recent interest rate cut is likely to cause arrears to level off, and recently introduced government measures aimed at supporting the buy-to-let market are likely to provide a last-minute boost to building society annual profits.

3. James Edwards, chief executive of the market leaders City and Provincial Building Society, said in a trading statement last week that he broadly concurred with analysts’ forecasts of full-year profits for his company to rise by 5% to £240m. However, the fact that soaring growth in the buy-to-let market (where C&P has a 19% share) has cooled significantly coupled with concerns about arrears has knocked 7.25p off the company’s share price, leaving it at 264p.

4. Despite predictions for growth across the sector as a whole averaging around 4.5%, the share prices of the five leading players in the market have declined by an average of just under 3%. Yields may be falling, but the restricted supply of new-build homes and continuing enthusiasm for buy-to-let have kept the housing market buoyant, and only the most pessimistic of analysts are predicting a slump. Nevertheless, cautious corporate investors have been reducing their holdings.

5. Such fears may well prove to be misplaced. Hints by the Bank of England regarding a further interest rate cut could underpin further growth.

6. An additional boost is likely to be provided by changes to pension rules from April 5th next year. Holders of Self Invested Personal Pensions (SIPPs) will be permitted to invest funds from their pensions in residential property.

7. Up to £15bn of pension cash is expected to flood into the market, including tax relief worth as much as £5bn. This is certain to create a boom in buy-to-let investment, shoring up building society yields, and to push up house prices, especially in areas where they have been in decline, creating more attractive investment opportunities.

8. In addition, the buy-to-let market is likely to continue to benefit from the fact that many would-be first time buyers remain priced out of the market, ensuring healthy demand for rental properties. Evidence suggests that large numbers of potential first time buyers are also delaying their plans to buy to due uncertainty on house prices, creating a build-up of demand which is likely to be released when house prices stabilize.

9. A spokesperson for the number two mortgage lender Bolton and Rochdale reported last month that new business volumes have grown steadily month on month from a low base, and that the growth of both the residential and buy-to-let mortgage markets remains robust.

10. However, this upbeat stance was offset by Banker and Mortgage Lender magazine, which predicted that house prices are poised to fall by an average of up to 7% across the UK. The South West in particular was viewed as overvalued, with prices in some areas set to see a drop as high as 15%. In contrast, London is now seen as slightly undervalued, following some dramatic falls over the last year and, according to the magazine, house prices there are set to rise by a minimum of 4% a year for the next three years.

B. Choose the definition which is closest to the meaning in the article.

1. buy-to-let property owners (paragraph 1)

a. people who rent their homes b. people who buy homes to rent to others

2. growth has cooled significantly (paragraph 3)

a. it's growing more slowly b. it's declining

3. a boom in buy-to-let investment (paragraph 7)

a. a lot more people buying-to-let b. slightly more people buying-to-let

4. tax relief worth as much as £5bn (paragraph 7)

a. up to £5bn reduction in tax to be paid b. up to £5bn increase in tax to be paid

5. would-be first-time buyers… (paragraph 8)

a. people who are going to buy their first home.

b. people who would like to buy their first home

6. …remain priced out of the market (paragraph 8)

a. find it very expensive b. can't afford it

C. Find words in the article with the same meaning as the following.

1. overdue mortgage payments (paragraph 1) m____________ a_____________

2. profits (paragraph 4) y____________

3. support (paragraph 7) s____________ u____________

4. low starting point (paragraph 9) l____________ b____________

5. worth less than the current price (paragraph 10) o____________-v____________

D. Complete the definitions.

1. Mortgage arrears are starting to level off means that mortgage arrears …

a. have stopped increasing b. are decreasing

c. are increasing more slowly than they were

2. There was soaring growth in the buy-to-let market means that…

a. profits from buy-to-let mortgages increased b. house prices increased

c. buy-to-let mortgages became more expensive

3. The housing market is buoyant means that …

a. house prices are rising b. house prices are static

c. house prices are falling

4. Investors have been reducing their holdings means that investors have been…

a. buying more shares b. selling all their shares

c. selling some of their shares

5. Interest rate cuts could underpin further growth means that interest rate cuts could…

a. cause further growth b. prevent further growth

c. be caused by further growth

6. Pension cash will flood into the market means that pension fund managers will…

a. avoid this market b. invest heavily in this market

c. make a lot of money from this market

7. New business volumes have grown steadily month on month means that…

a. business has increased every month b. profits have increased every month

c. the number of new customers has increased every month

8. Prices are poised to fall by 7% means that…

a. prices are falling b. prices are expected to fall c. prices will fall

E. Single out the main points of the text. Use the following opening phrases.

The text looks at the (the problem of)…;

The text deals with the issue of…;

It is clear from the text that…;

Among other things the text raises the issue of…;

The problem of…is of great importance;

One of the main points to be singled out is…;

In this connection, I’d like to say…;

I find the question of…very important because…;

I think that…should be mentioned here as a very important mechanism of…

Task 2. Translate the text into Ukrainian.

A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan. However, the word mortgage alone, in everyday usage, is most often used to mean mortgage loan.

The word mortgage is a French Law term meaning "death pledge", meaning that the pledge ends (dies) when either the obligation is fulfilled or the property is taken through foreclosure.

A home buyer or builder can obtain financing (a loan) either to purchase or secure against the property from a financial institution, such as a bank or credit union, either directly or indirectly through intermediaries. Features of mortgage loans such as the size of the loan, maturity of the loan, interest rate, method of paying off the loan, and other characteristics can vary considerably.

In many jurisdictions, though not all (Bali, Indonesia being one exception), it is normal for home purchases to be funded by a mortgage loan. Few individuals have enough savings or liquid funds to enable them to purchase property outright. In countries where the demand for home ownership is highest, strong domestic markets for mortgages have developed.

Many other specific characteristics are common to many markets, but the above are the essential features. Governments usually regulate many aspects of mortgage lending, either directly (through legal requirements, for example) or indirectly (through regulation of the participants or the financial markets, such as the banking industry), and often through state intervention (direct lending by the government, by state-owned banks, or sponsorship of various entities). Other aspects that define a specific mortgage market may be regional, historical, or driven by specific characteristics of the legal or financial system.

Mortgage loans are generally structured as long-term loans, the periodic payments for which are similar to an annuity and calculated according to the time value of money formulae. The most basic arrangement would require a fixed monthly payment over a period of ten to thirty years, depending on local conditions. Over this period the principal component of the loan (the original loan) would be slowly paid down through amortization. In practice, many variants are possible and common worldwide and within each country.

Task 3. Render the text in English.

Дві великі різниці

Деяким людям здається, що обидва варіанти – кредит і розстрочка (deferred payment) – ідентичні. Але це тільки на перший погляд. Справді, в обох випадках від клієнта вимагаються початковий внесок і оплата позикових коштів у вигляді річної відсоткової ставки. Але розстрочка – це придбання нерухомості, плата за яку вноситься частинами з певним періодом у кілька місяців або років. Іпотека ж – це кредит під заставу нерухомості з великим терміном і невеликими щомісячними платежами. При цьому, на відміну від іпотечного житла, квартира, що купується в розстрочку, переходить у власність покупця тільки після повної оплати її вартості, а з клієнтом укладається договір оренди до моменту повного розрахунку.

Якщо йдеться про іпотеку, то розмір початкового внеску зазвичай обмежується 10-30% від вартості купованої нерухомості. При розстрочці ж зазвичай він становить половину, а то й 60 - 70% від вартості житла. Відсоткова ставка за іпотечними кредитами зараз у середньому коливається від 16 до 24% річних у гривні. Забудовники ж найчастіше пропонують розстрочку без нарахування відсотків до закінчення будівництва або на певний невеликий термін після закінчення (зазвичай до трьох років), але вже з нарахуванням відсотків. Ставки в останньому випадку знаходяться в діапазоні від 5% до 16% річних на залишок заборгованості і залежать від розміру початкового внеску, але все одно зростають прямо пропорційно терміну. Практика показує, що за під­сумками розстрочки, оформленої на два роки, покупець переплачує не більш ніж 10% вартості житла.

Лише кілька компаній можуть дозволити собі почекати п'ять років, але про довший строк навіть не йдеться: у забудовника немає «довгих» ресурсів, на відміну від банку, який може кредитувати за рахунок залученого довгострокового фінансування. З іншого боку, невеликі терміни — це також один із чинників, який дозволяє забудовникам виставляти такі лояльні вимоги до покупців при розстрочці.

Як відомо, кредити на придбання квартир у споруджуваних об'єктах банки видають із великим небажанням, якщо це не спільний проект із забудовником. У цьому разі банк упевнений в надійності забудовника і готовий надати позику покупцям квартир у конкретній новобудові.

Task 4. A. A number of types of mortgage loans are available in the market. Different borrowers may qualify for different ones. A skilled mortgage banker can help find the best type of mortgage loan for each particular situation. Split into groups. Choose one piece of information out of 1-7 given below. After studying this information complete the table “Types of Mortgage Loans”.

B. Present the loan type you have studied to your group mates making the use of the table you have completed. While listening to your group mates fill in the missing information in your tables.