12 Discuss what would happen to the discount factor for mort

12. Discuss what would happen to the discount factor for mortgages under the following circumstances:

a. A recession is expected in the near future

b. The Fed has taken action to raise interest rates

c. International financial crises have caused an inflow of funds into the United States

d. The federal government is running a larger surplus than expected

Solution

a) Mortgage discount factor is likely to rise due to rising likelihood of non repayment due to impending recession as the risk has increased.

b) Mortgage discount factor is likely to rise to accomodate the risk free rate in the rate.

c) Mortgage discount factor is likely to fall as increased liquidity shall lead to increased supply of loans

d)Mortgage discount factor is likely to fall as economy is robust and government shall increase domestic expenditure