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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.
**Correct Answer: D** **Explanation:** 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. A is incorrect. One characteristic of subprime mortgages of the time is that they were relatively easy to obtain even without proper documentation – "NINJA" (no income, no job, no assets) loans were even common. B is incorrect. Loan-to-value ratios steadily increased both as down payment requirements were relaxed (43% of first-time home buyers paid zero down) and real estate prices eventually fell. C is incorrect. Mortgage brokers were typically compensated on the volume of loans and not their performance, so there were very few consequences to the brokers when loans failed.
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A junior risk analyst is asked to summarize the developments leading up to the financial crisis of 2007 – 2009. As part of the summary, the analyst researches the role of subprime mortgages as a contributing factor to the crisis. Which of the following correctly describes a role or impact of these mortgages in the years 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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