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:

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.