Residential mortgages historically carried a capital requirement of 4 percent. Why did these mortgages, bundled as part of the mortgage-backed securities issued by investment banks, turn out to be far more risky than historically indicated?
A) Rating agencies miscalculated the historical risk of traditional fixed-rate residential mortgages.
B) Investment banks leveraged these mortgage-backed securities more than was allowable under SEC rules.
C) Lower mortgage lending standards increased the likelihood that defaults would occur.
D) Investment banks held too much capital relative to these mortgage-backed securities.

Question

Quizplus · Accepted Answer

Lower mortgage lending standards increased the likelihood that defaults would occur, making the mortgage-backed securities riskier than historically indicated.

Residential Mortgages Historically Carried a Capital Requirement of 4 Percent