liquidity conundrum

Since I am reading the smallest and easiest chapters first, heres a question: One explanation for how a subprime mortgage borrower is granted a free at-the-money call option on the value of their property is that: A) no down payment was required although there were still origination fees to obtain the mortgage. B) no origination fees were required but there was still a down payment required to obtain the mortgage. C) no down payment or origination fees were required to obtain the mortgage.



C In either A or B the borrower risks losing money if the value of the home tanks and he has to walk away. Since he risks losing money, the option isn’t “free”.

Ok, the answer is C. if there is no down payment or no origination fees, how the hell are you taking out a mortgage? Can someone pls explain. I’d like to take out this mortgage too.

no down payment, and origination fees rolled into the mortgage. Buy house for 200k, fees are 10k, your mortgage is 210k. Done. Often. Bad idea.

subprime my friend

The origination fees are typically capitalized into the mortgage via the interest rate (i.e. you pay down the closing costs with rate increases). The no down payment is also factored in through the interest rate. Since a buyer with 0% down is more risky, banks will charge a higher rate to cover that risk. As much as you’d love to get that mortgage, given current credit conditions it’s just not going to happen. Lenders have learned from their mistakes and won’t issue such mortgages anymore… :frowning: