It is a fact that the federal government (1) encouraged the development of the s
ID: 2359921 • Letter: I
Question
It is a fact that the federal government (1) encouraged the development of the savings and loan industry, (2) virtually forced the industry to make long-term fixed-interest-rate mortgages, and (3) forced the savings and loans to obtain most of their capital as deposits that were withdrawable on demand. (a) Would the savings and loans have higher profits in a world with a normal or an inverted curve? (b) Would the savings and loan industry be better off it the individual institutions sold their mortgages to federal agencies and then collected servicing fees or if the institution held the mortgages that they originated?Explanation / Answer
t is a fact that the federal government (1) encouraged the development of the savingsand loan industry; (2) virtually forced the industry to make long-term, fixed-interest-rate mortgages; and (3) forced the savings and loans toobtainmost of theircapital asdeposits that were withdrawable on demand. Would the savings and loans have
Taking the funds fromindividual (short term basis) and lendingthis money to commercial mortgageborrowers (long termbasis).So theIncome of S&Ls= Long term interest rate - Short term interest rate.
“Normal ” Yield CurveUpward -Sloping( Long term interestrate> Short term interest rate)Inverted
Yield Curve Downward-Sloping Curve (Long terminterest rate< Short term interest rate)
Therefore, the profit of S&Ls will be higher in a world with “Normal ” Yield Curve
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