One of the contributing factors in the 2007 U.S.residential housing collapse was the use of option reset adjustable rate mortgages (ARMs).Which of the following best describes this financial vehicle?
A)Mortgage payments were set based on prevailing market interest rates but on only a portion of the value of the mortgage. The unpaid balance was deferred for payment in a future period.
B)The payment on the mortgage, at prevailing market rates, was based on the full value of the mortgage but was split between a portion of the payment made by the property owner, with the balance paid by a third-party financial institution.
C)Payments made on the full value of the mortgage were based on below-market interest rates. Balances owing as a result of the difference between this rate and the prevailing market interest rate were carried forward and ultimately resulted in significantly higher future payments.
D)Lending authorities initially allowed for the issuance of adjustable rate mortgages but subsequently disallowed them when it "tightened the rules." The new requirement that all mortgages be on a fixed rate basis resulted in the exclusion of many potential new home buyers, thus drying up demand in the residential housing market.

Question

Quizplus · Accepted Answer

Option reset ARMs allowed borrowers to make payments based on a below-market interest rate, resulting in a balance owed that was carried forward and ultimately resulted in significantly higher future payments. This contributed to the housing collapse as borrowers were unable to afford their future payments, leading to foreclosure and market disruption.

One of the Contributing Factors in the 2007 U