Assignment on Shared Responsibility Mortgages

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NAME:
ID NO:
BUS502 Principles of Economics for Accountants – Semester 1 2019
Assessment task 2 – Responses to articles - Article 3
DUE via Safe Assign 11:59 pm Friday, May 31
Shared Responsibility Mortgages
https://equitablegrowth.org/shared-responsibility-mortgages/
Access the article at the URL given above and answer the questions in
the spaces below. Use full sentences and show all necessary working
but do not use more space than is given here. Please consult the mark-
ing rubric, which is available in a file titled, “Marking Rubric Article 2
Task 3”, before answering the questions. There is no need to draw any
graphs. Just explain very briefly in words.
(1) The authors write that ‘.research shows that debt contracts have
large negative externalities on the economy that are not properly
priced among private parties’. Using the concept of externalities stud-
ied in this course, explain the authors’ statement.
The statement in question largely routes from the great economic crisis which
world experienced due to subprime crisis in 2007 .Negative Externality emerges
when the cost or negative impact is borne by the parties who are external to the
contract. If a debt contract is not prices properly in tandem with the property
prices and considering the various influencing factors, they can negatively affect
the economy and induce externalities.Debt contracts are contracts are largely
observed when there are no property rights assigned over the assets or belong-
ings and can be a reason for deflating economy. Debt owners are always consid-
ered at higher stake. Debt contracts affect first the homeowners before affecting

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the debt lenders and their negativity gets doubled. Middle and low income home-
owners are worst hit at times when the house prices drop, leaving a ripple effect
on the economy. (Maharjan, 2019)
(2) Explain how the ‘shared-responsibility mortgage’ contract mitigates
the negative externality of the debt contract..
In the 21st century, Housing market has been playing a key role in the economic
growth and collapse or misery.
Shared responsibility mortgages is a way of balancing out the effect on home-
owners in case of downfall of the prices of their houses. It’s a practice of averag-
ing out the principal balance of the mortgage and interest payments associating
them to a local house price index deriving the average value of houses in the
pin code of the underlying or home the one in question. Such responsibility mort-
gages adjusts the fall in the prices of the interest payments and the principal
amounts in the same percentage as prices fall for the houses in the neighboring
places. (Thoma, 2019)
Debt contracts, simply are the ones wherein one party, known as borrower
agrees to repay the funds to other party known as lender which can be short or
long term. The traditional debt contracts enforce the borrowers to bear almost
the entire risk of the contract volatility, irrespective of the fact, if they can afford
or not.
These debt contracts are outshone by a relaxation provided by SRM wherein the
borrower is offered the protection against the decreased prices of the property or
mortgaged value and vice versa the borrower will also have to lay up any gain in-
curred in the property to the lender. (Failure, 2019).
SRMs are relatively flexible, enabling better understanding to a homeowner as
an individual and lastly, providing benefits in the long run unlike the prevalent
debt contracts.
(3) The authors claim that the government tilts the field in favour of
typical or standard debt contracts by making the standard debt con-
tracts securitizable, whereas, ‘shared responsibility mortgages’ are not
securitizable. Explain how securitization tilts the field.
The practice of pooling of residential mortgages, commercial mortgages or other
types of debt obligations and transforming them through financial Reengineering
into marketable securities is known as securitization. Securitization played a role
in economic crisis in the past due to majorly investors willing to buy securities
which have highly rated underlying mortgages by the credit rating agencies, to
whom they basically delegated due diligence. (House of Debt, 2019) As of late,
the guarantee behind agency securities is the primary way by which Federal gov-
ernment backstops the mortgage system, however the agency securities has not
always dominated the U. S. Mortgage system. Banks and savings have actually
been the major sources contributing approximately 50% of the funding percent-
age of the home loans. The government can play a pivotal role in tilting the secu-