First installment default regulation

In the USA, the legal requirement that mortgage banks must also repurchase already securitized securities (i.e. collateralized debt obligations) if the borrower fails to make the first installments. – The purpose of this provision is to prevent banks from granting reckless loans to private households (“home-builders”). Institutions circumvented this provision by exempting borrowers from repayments for the first few years and charging only a very low interest rate for the construction loan (covenant-light credits). Only then is the interest rate brought into line with the market rate, and now the first repayments are due. Many private households fell into this trap, which triggered turbulence first in the mortgage market and then in the financial market as a whole in the summer of 2007. – See amortization, negative, contagion effects, deferral period, loan-to-value, loan-to-value liability, limited, downgrade trigger clause, housing bubble, housing prices, jingle mail, credit freeze, leveraged loan, mark-to-model approach, mortgage equity withdrawal, panic selling, rollover risk, subprime lending, subprime crisis, securitization, forfeiture clause, advance, held low, homeownership, interest deferral, twenty-two-eight loan. – On the so-called subprime crisis, see the ECB’s Monthly Bulletin of September 2007, pp. 33 ff. (detailed account of the distortions in the financial market and overview of the measures taken by the
ECB), ECB Monthly Bulletin of November 2007, p. 18 ff. (impact of the subprime crisis on institutions’ balance sheets), ECB Monthly Bulletin of August 2009, p. 18 ff. (legal differences between the mortgage markets in the euro area and the United States).

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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
E-mail address: info@ekrah.com
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