Explanation:
Mortgage lenders in the United States started to relax lending standards in about 2000. Part of the new strategies involved restructuring repayment terms to allow borrowers to pay a small rate of interest for the first 2–3 years followed by substantially higher rates in the later years. The immediate effect was an upturn in demand for homes as families previously unqualified could now afford to repay borrowed funds. The lenders deemed the move as a low-risk strategy because home prices were continually increasing, meaning that potential borrower default was adequately mitigated by an increasing collateral value.
Choice A is incorrect because the introduction of adjustable mortgage rates with initial 'teaser rates' actually represented a relaxation, not a tightening, of lending standards. This strategy aimed at making mortgages more accessible to a broader range of potential homeowners by offering lower initial costs, which in turn, increased the number of mortgage applications.
Choice C is incorrect because while the introduction of adjustable mortgage rates with 'teaser rates' did lead to an increase in demand for homes, it did not immediately cause house prices to rise. The increase in demand for homes was primarily due to the lower initial rates making mortgages more affordable for many families who were previously unqualified.
Choice D is incorrect because, while the adjustable mortgage rates with initial 'teaser rates' did eventually contribute to a higher number of mortgage defaults, this was not the immediate effect. Initially, the lower rates made mortgages more accessible and attractive, leading to an increase in applications. The rise in defaults happened later when the 'teaser rates' ended, and the higher rates were applied, which many homeowners were unable to afford.
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Q.135 In the early 2000s, mortgage lenders introduced a new strategy to attract more customers by offering adjustable mortgage rates with initial 'teaser rates'. This strategy involved a lower interest rate for the first few years, followed by a significantly higher rate in the subsequent years. What was the immediate impact of this strategy on the mortgage market?
A
Tighter lending standards, making it more difficult for potential homeowners to secure a mortgage.
B
The number of mortgage applications started to increase.
C
The price of houses started to rise.
D
A rapid increase in mortgage defaults.