Investors will lose money on mortgage-backed securities if:

Question

Quizplus · Accepted Answer

Mortgage-backed securities are created by pooling a large number of mortgages together and selling them to investors. The investors receive regular payments based on the interest rates and principal payments made by the homeowners. If homeowners stop making their mortgage payments, it can lead to lower payments or even default, which can cause losses for investors. Therefore, option B is the correct answer. Option A is incorrect because low interest rates can make mortgage payments more affordable for homeowners, which can reduce the risk of default. Option C is incorrect because if homeowners pay off their mortgages early, it can actually benefit investors who receive their principal payments faster than expected. Option D is incorrect because an increase in the average price of a house would mean that the underlying asset (the home) is becoming more valuable, which can reduce the risk of default and benefit investors.

Investors Will Lose Money on Mortgage-Backed Securities If