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Answer: While housing prices were rising, subprime borrowers would typically refinance adjustable-rate mortgages into another similar mortgage as soon as the teaser rate period ended.
A is correct. Some borrowers used subprime lending to purchase a house in which they intended to live, whereas others were merely speculating on rising home prices. For either type of borrower, an adjustable-rate loan could typically be refinanced into another similar mortgage once the teaser rate period ended (as long as housing prices rose).
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A risk expert is leading a lecture for financial analysts on the impact of subprime mortgages during the 2007-2009 economic downturn. To begin, the expert provides an overview of the mechanics of subprime mortgages and outlines the market trends in the subprime sector leading up to the crisis. Which of the following statements should the expert include in the lecture?
A
While housing prices were rising, subprime borrowers would typically refinance adjustable-rate mortgages into another similar mortgage as soon as the teaser rate period ended.
B
By securitizing subprime mortgages, banks created pools of assets that were mostly rated below investment-grade to sell to investors.
C
The growth in demand for subprime mortgage financing leading up to the crisis was fueled in part by high interest rates and a strong housing market.
D
Based on the originate-to-distribute (OTD) model for subprime mortgages, the bank that initiated the mortgage loans incurred all the losses on the loans.
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