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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.

 

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