6) Housing boom to bust example: (record each event on the balance sheet below)

Katrins Balance Sheet

Assets	Liabilities
Cash	Mortgages+Home Equity Loans
	Net Worth
Value of House

a) Suppose initially Katrin has $10,000 in cash for example funds in a checking account. This is Katrins only financial asset and she initially has no debts. What is Katrins financial net worth? What is Katrins leverage ratio?

b) Then Katrin buys a $300,000 house with $290,000 mortgage and a $10,000 down payment. What happens to Katrins net worth and leverage ratio?

c) Time passes and the value of Katrins house increases to $450,000. What happens to Katrins net worth? What is Katrins return on her $10,000 down payment? What happens to Katrins leverage ratio?

d) Katrin takes out a home equity loan of $50,000 to redo her kitchen. Katrin figures that her house increases in value by $50,000. What happens to Katrins net worth? What happens to Katrins leverage ratio?

e) More time passes and the housing boom turns into a bust. The value of Katrins house falls to $200,000. What happens to Katrins net worth? Could it make financial sense for Katrin to default on her mortgage and home equity loan?