CASE STUDY 5 SUB-PRIME MORTGAGES In the period 2001 to 2008 many lenders extended mortgages to borrowers who previously would not have qualified. They also made first-time home ownership easier by offering very low initial interest rates that often later rose to more ordinary levels. Concerns about mortgage defaults were muted by the assumption that house values could only go up (as they had for many years). Let's look at an example, The Chens wish to buy a $400 000 home. The bank is willing to lend them the full $400 000. The monthly payment will be calculated using j2 = 4% with a 40-year repayment period. However, after 3 years payments will be recalculated at j2 = 7% (with 37 years left on the mortgage). (Note: The sub-prime mortgage problem was more of a crisis in the United States, where banks often lent money without regard to whether the borrower had income or a job; in Australia this was less of a problem. However, there was still a short period of time when Australian banks offered Mortgages with an initial low interest rate and a 30-year repayment period.) a) Calculate the initial monthly payment. b) Calculate the monthly payment starting in year 4. C) If house prices had dropped during that 3-year period, what might the Chens be tempted to do