CNN Classroom Edition: Busted! Mortgage Meltdown

(CNN Student News) -- Record the CNN Special Investigations Unit Classroom Edition: Busted! Mortgage Meltdown when it airs commercial-free on Monday, August 4, 2008, from 4:00 -- 5:00 a.m. ET on CNN. (A short feature begins at 4:00 a.m. and precedes the program.)

Program Overview

Home loans gone bad are wrecking the U.S. economy. CNN teams up with Fortune Magazine's Andy Serwer to investigate how the housing boom went bust. The fallout begins on Wall Street, where billions of dollars in American mortgages were bought, bundled and sold around the world. CNN takes the high-stakes mortgage game to Delmonico's, a Wall Street institution since 1837, where the likes of J.P. Morgan and Andrew Carnegie once wheeled and dealed. Host Andy Serwer plays dealer and invites a few experts to face off on the mortgage crisis. Guest players include New York Times columnist and Princeton economist Paul Krugman, CNN's Personal Finance Editor Gerri Willis, securities guru Janet Tavakoli, investment strategist Peter Dunay and mortgage broker Jon Shibley.

Grade Levels: 11-12, College

Subject Areas: Business, Economics, Finance, Social Studies, Life Skills

Objectives:

The CNN Special Investigations Unit Classroom Edition: Busted! Mortgage Meltdown and its corresponding discussion questions and activity challenge students to:

1. Learn about the different types of home loans that are available to consumers;
2. Examine the current mortgage crisis in the U.S.;
3. Identify the economic and social ripple effects of this crisis;
4. Determine ten things that first-time homebuyers should know before they shop for a mortgage.

Curriculum Connections

Economics America National Standards

Standard 10 : Role of Economic Institutions

Students will understand that: Institutions evolve in market economies to help individuals and groups accomplish their goals. Banks, labor unions, corporations, legal systems, and not-for-profit organizations are examples of important institutions. A different kind of institution, clearly defined and enforced property rights, is essential to a market economy.

Standard 16 : Role of Government

Students will understand that: There is an economic role for government in a market economy whenever the benefits of a government policy outweigh its costs. Governments often provide for national defense, address environmental concerns, define and protect property rights, and attempt to make markets more competitive. Most government policies also redistribute income.

The Economics America National Standards (http://www.ncee.net/ea/standards/) are published by the National Council on Economic Education (http://www.ncee.net/).

Social Studies

Standard V. Individuals, Groups and Institutions: Social studies programs should include experiences that provide for the study of interactions among individuals, groups, and institutions.

Standard VI. Power, Authority, and Governance: Social studies programs should include experiences that provide for the study of how people create and change structures of power, authority, and governance.

The Curriculum Standards for Social Studies (http://www.socialstudies.org/standards/strands/) are published by the National Council for Social Studies (http://ncss.org/).

Discussion Questions

1. Why do you think that owning a home has been hailed as the "American dream"? In your opinion, what are the benefits and drawbacks of owning a home?
2. What is "predatory lending"? What is "reverse redlining"? What are some of the problems associated with predatory lending practices and reverse redlining, as discussed in the program?
3. What are subprime mortgages? How do they differ from other types of home loans? Why do you think that CNN's Gerri Willis calls subprime mortgages "strangulation loans"?
4. According to the program: Why did subprime mortgages become so popular in recent years? What problems have arisen with subprime mortgages? How has the increase in subprime lending affected foreclosure rates?
5. What is meant by the term "housing bubble"? What have been some of the economic and social ripple effects of the housing bubble bursting?
6. What is the housing market like in your community? Have you noticed a change in the prices of houses or the number of foreclosures? Explain. Do you think that the current mortgage crisis is impacting the economy in your community? If so, how? If not, why not?
7. According to the program, what roles did Wall Street, the Federal Reserve, banks and other lenders, and homebuyers play in the current housing crisis?
8. What arguments for and against regulating loan lending practices are discussed in the report? What is your view on this issue?
9. According to the program: What is the difference between a "recession" and a "depression"? Why do some of the panelists in the program believe that the U.S. housing market is in a depression?
10. Are you concerned about the state of the U.S. housing market? Why or why not?
11. In your view, what role might the federal and local governments, financial institutions and consumers each have in fixing the housing crisis? What would you suggest the average consumer do to avoid becoming a statistic in this mortgage meltdown?

Suggested Activity

Point out to students that one of the best ways for them to prepare for homeownership is to arm themselves with knowledge, and that the purpose of this activity is to help them obtain this information.

Group students and instruct each group to prepare a PowerPoint presentation on the top ten things that first-time homebuyers should know before they shop for a mortgage. Groups may want to include information that addresses these points:

1. The types of home loans that are available to consumers
2. How these loans differ
3. How to qualify for a mortgage
4. What a borrower should do to get the best interest rate
5. The steps involved in the loan application process

Have groups deliver their presentations to the class. If possible, invite a realtor or mortgage broker to attend the presentations and discuss the guidelines that are used to determine whether or not a homebuyer can afford a home.

Extension

Following the presentations, direct students to print and online resources to identify homes that are for sale in their community, as well as the current interest rates for a 30-year fixed mortgage, a 15-year fixed mortgage and a 5/1 ARM. Next, have each student select a house and use an online amortization schedule calculator to determine what the monthly payment (principle + interest) would be for each type of loan, assuming that the loan was for 80% of the purchase price of the home. Instruct students to identify the potential benefits and drawbacks of each type of loan, and to select the loan type that they feel would be the best choice for the homebuyer. Then, have each student determine the salary that he or she thinks a person would need to earn to afford the monthly mortgage payments. After students share their research, ask:

1. What percentage of your monthly income would you feel comfortable spending on a home mortgage and why?
2. What other financial obligations would you have to consider that are associated with owning a home?
3. What other financial obligations not associated with home ownership might you have to consider?
4. How has this activity affected your understanding of what it means to own a home?

Keywords

mortgage, subprime, foreclosure, economy, interest rates, credit risk, housing prices, homeowner, real estate, mortgage broker, reverse redlining, Wall Street, Federal Reserve, securities, regulation, predatory lending, housing bubble, capitalism, recession, depression