Which of the following represents a collateral shock?
A) John obtains a mortgage to buy a home for $350,000 with no money down.
B) James sells his house for $200,000 and has $20,000 left over after paying off the mortgage.
C) Jack sells his house for $650,000 but is short $50,000 to pay off his mortgage.
D) Jeff buys a house for $150,000 in cash.

Question

Quizplus · Accepted Answer

A collateral shock occurs when the value of the collateral for a loan decreases, causing a ripple effect on the borrower's ability to repay the loan. In this case, Jack selling his house for less than what he owes on the mortgage creates a collateral shock, as he will not have enough funds to fully pay off the loan. The other choices do not involve a decrease in collateral value.

Which of the Following Represents a Collateral Shock