Question

A mortgage stress test means that

a. Banks have to stress test their existing mortgages
b. Borrowers have to qualify at a rate higher than the contracted mortgage rate
c. Borrowers have to pay 2% more on their mortgage payments
d. Banks need to borrow only from the government at 2% lower rates
e. None of the above

Answer 1

A mortgage stress test requires borrowers to qualify for loans at an interest rate higher than the contracted mortgage rate to ensure they can manage payments even under financial strain. This practice helps maintain financial system stability and prevent situations similar to those that led to the 2008 recession.

Step-by-step explanation:

A mortgage stress test is a tool used by banks and lenders to evaluate how borrowers would cope with higher interest rates. It ensures that borrowers can still afford their mortgage payments even if interest rates rise, or their financial situation changes. The statement that borrowers have to qualify at a rate higher than the contracted mortgage rate is correct, as it pertains to the mortgage stress test (option b).

The 2008 recession highlighted the dangers of aggressive lending practices and the issuance of subprime loans. To prevent such occurrences, the application of mortgage stress tests became more stringent. Properly conducting these stress tests is essential for maintaining the stability of the financial system and ensuring borrowers are not over-leveraged.