inside the meltdown

Introductory Activity: “Financial Background and Context”

Lesson Objectives:

Students will:

• Gain an overview of the mortgage process from both the buyer's and lender's perspective
• Learn about credit scores and prime/subprime mortgages
• Understand how leverage works in the mortgage process

Materials Needed:

Student handouts: Lenders and Borrowers and Credit Scores and Loans

Time Needed: One class period

Instructions:

• Explain to students that they will be learning about the mortgage borrowing and lending process and the role that credit scores and leverage play.
• Distribute the Lenders and Borrowers and Credit Scores and Loans handouts to students.
• Review the following information with students. (Note: This information is included in the students' Lenders and Borrowers handout.)
• A mortgage is a loan to finance the purchase of real estate, usually with specified payment periods and interest rates. The borrower (mortgagor) gives the lender (mortgagee) a lien on the property as collateral for the loan. (Source: investorwords.com)
• Mortgage lenders make loans to homeowners (borrowers). Lenders then sell the loans to other banks (also called secondary markets).
• Banks pool their loans together and sell the rights to the interest payments on the mortgages to investors in the form of bonds.
• A bond is a debt instrument issued for a period of more than one year with the purpose of raising capital by borrowing. The federal government, states, cities, corporations and many other types of institutions sell bonds. (Source: www.investorwords.com)
• If borrowers repay the loans and home prices rise, the bond investments become worth more money. If borrowers do not repay the loans and/or if home prices fall, the bond investments become worth less money.
• Divide students into two groups: borrowers (house buyers) and mortgage lenders. Provide students with a few minutes to read both handouts and to answer their specific group's questions from their handouts. (See possible answers on the Answer Sheet.)
• As a whole class, discuss student responses to the questions.