Financial Risk Manager Part 1
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A risk consultant is giving a presentation to a group of analysts on the topic of subprime mortgages and how they contributed to the 2007–2009 financial crisis. The consultant begins the presentation by providing an introductory overview describing the mechanics of subprime mortgages as well as some subprime market trends that occurred in the years leading up to the crisis. Which of the following statements would be correct for the risk consultant to include in the presentation?
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.