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This is a 3 page paper that provides an overview of the mortgage crisis. Causes and possible responses are examined in the course of discussion questions. Bibliography lists 0 sources.
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3 pages (~225 words per page)
File: KW60_KFmortg3.doc
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listed below. Citation styles constantly change, and these examples may not contain the most recent updates. Subprime Mortgage Case Questions , 2/2011 --for more
information on using this paper properly! 1. This case refers to the "classic trap of borrowing short and lending long." Explain what this means. What are the advantages of
borrowing short and lending long? What are the disadvantages? Answer: Borrowing short and lending long is the practice of entering a short-term agreement in which one borrows money at
a small interest rate and then lends that same money out to another party over the long term, at a much higher interest rate. This is, for example, what banks
are doing when they grant mortgages: they borrow money short-term from depositors and other banks in order to provide mortgages to homebuyers who will pay lower interest at a long
rate of 20-30 years. The primary advantage of borrowing short and lending long is that it enables one to invest in business ventures without a great deal of startup capital.
So long as one is capable of paying back some of the short term loans, then the long term interest gains will quickly translate into a profit. Of course, this
practice has its disadvantages, as well. For instance, when one borrows short, one often has to borrow from multiple depositors in order to have sufficient funds to loan out into
long term contracts. At any given point in time, all of these depositors might suddenly decide they want to be paid back, at which point the borrower would likely face
substantial difficulty as the majority of his or her assets would theoretically be tied up in long term investments, making this repayment difficult as best. 2. Why do the Sovereign
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