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 extended to both prime and sub-prime borrowers experienced the largest increase in default and foreclosure rates as short-term interest rates began to rise in 2005. This is because the interest rates on these mortgages adjust periodically based on prevailing market rates, which makes them vulnerable to fluctuations in interest rates. As short-term interest rates increased, borrowers with adjustable rate mortgages saw their monthly mortgage payments increase, which made it difficult for some to keep up with their payments and led to defaults and foreclosures.

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