Answer: The number of mortgage applications started to increase.

## Explanation The correct answer is **B** - The number of mortgage applications started to increase. ### Why this is correct: - Mortgage lenders in the United States started to relax lending standards around 2000 - The adjustable mortgage rates with initial 'teaser rates' offered lower interest rates for the first 2-3 years, making mortgages more affordable - This strategy immediately increased demand for homes as families who were previously unqualified could now afford to repay borrowed funds - The immediate effect was an upturn in mortgage applications, not tighter standards or price increases ### Why other options are incorrect: **A is incorrect** - The introduction of adjustable mortgage rates with 'teaser rates' actually represented a **relaxation** of lending standards, not tightening. This strategy aimed to make mortgages more accessible. **C is incorrect** - While the strategy did lead to increased demand for homes, it did not **immediately** cause house prices to rise. The primary immediate effect was increased mortgage applications. **D is incorrect** - The rapid increase in mortgage defaults occurred **later**, when the 'teaser rates' ended and higher rates were applied that many homeowners couldn't afford. This was not the immediate impact. ### Key Risk Management Insight: This case demonstrates how risk management strategies can have unintended consequences. Lenders viewed this as low-risk due to continually increasing home prices providing collateral protection, but this assumption proved flawed when market conditions changed.

Author: Tanishq Prabhu