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Answer: Interest rates rose sharply on many subprime mortgages after a short initial low-rate period, forcing some borrowers to default.
D is correct. Many subprime mortgages were organized as adjustable-rate mortgages, with a very low initial "teaser" rate jumping up dramatically after two or three years. Borrowers found it easy to get these loans even with no income or job documentation, and were okay as long as they could refinance the loan or sell the property within the initial period. But as the real estate market started to weaken, more borrowers held their mortgages past the end of the initial period, and many were no longer able to afford to maintain the mortgage after the huge jump in payments.
Author: LeetQuiz Editorial Team
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A junior risk analyst has been assigned the job of summarizing the factors that contributed to the financial crisis of 2007-2009, with a specific emphasis on the impact of subprime mortgages. Which of the following statements precisely describes the role or effect of subprime mortgages in the period leading up to the crisis?
A
Strict documentation requirements for new borrowers resulted in a liquidity crisis for real estate due to a lack of qualified borrowers.
B
Initial loan-to-value ratios steadily decreased for new subprime borrowers in the years leading up to the crisis.
C
Most mortgage brokers were compensated based on the performance of subprime mortgages they originated, and were forced to pay back large commissions as loans began to fail.
D
Interest rates rose sharply on many subprime mortgages after a short initial low-rate period, forcing some borrowers to default.
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