As short-term interest rates began to rise in 2005, which one of the following mortgage loan categories experienced the largest increase in default and foreclosure rates?
A) Fixed rate mortgages to prime borrowers.
B) Fixed rate mortgages to sub-prime borrowers.
C) Adjustable rate mortgages extended to both prime and sub-prime borrowers.
D) Adjustable rate mortgages to sub-prime borrowers only; the default and foreclosure rates of these loans extended to prime borrowers declined.

Question

Quizplus · Accepted Answer

Adjustable rate mortgages (ARMs) are more sensitive to changes in interest rates. As short-term rates rose, borrowers with ARMs, especially those with sub-prime credit, faced higher payments, leading to increased defaults and foreclosures.

As Short-Term Interest Rates Began to Rise in 2005, Which