Q19 - One of the things lenders do in evaluating the risk

[ohthatpatrick]

Question Type:
Explain/Resolve

Stimulus Breakdown:
FACT 1: Lenders consider credit score in assessing loan risk (higher score = less risk)
YET FACT 2: For mortgage loans, a higher percentage of high credit score ppl defaulted than did lower scoring people.

Answer Anticipation:
We're essentially thinking, "If lenders are correct to think that, in general, higher credit scorers are less likely to default, then why in the case of mortgage loans is it the opposite of that?" i.e., what's special about mortgage loans that leads to people with high credit scores defaulting a lot?

Correct Answer:
A

Answer Choice Analysis:
(A) YES, this tells us something specific about mortgage lenders that may differentiate them from other lenders. And it tells us something specific about borrowers with high credit scorers that may help differentiate them from other borrowers. This answer is essentially suggesting that when it comes to mortgage loans, people with high credit scores get a quick, free pass into getting the loan, while other borrowers are much more scrutinized on other levels as well. Someone with a low credit score has been thorougly vetted otherwise, so the ones receiving loans are pretty sturdy. The high credit score people have these un-investigated other factors that's leading them to default.

(B) Super weak … "sometimes include errors?" We would need to know that mortgage lenders MORE OFTEN receive erroneous information than do other types of lenders.

(C) This doesn't tell us what's going on in the world of mortgage loans that turns conventional wisdom on its head.

(D) Somewhat tempting? This at least clarifies that mortgage lending/borrowing is very distinct from other forms of lending/borrowing. But we would have to add some storyline like, "Because it's atypically large, the people with high credit scores become more likely than others to default on the loan." Huh? What's the commonsense connection there? Why would the effect of a bigger-than-usual loan be different for people with high credit scores vs. all others?

(E) The actual prevalence of low / medium / high scorers doesn't matter. We're just examining a disproportionate frequency of defaults between high scorers vs. others, so we don't care how common these scores are in raw numbers.

Takeaway/Pattern: The only answer that helps us distinguish high credit score people from others, in the world of mortgage lending, is (A).

#officialexplanation

[ArekS342]

Wouldn't this question require us to bring in the outside knowledge of understanding what defaulting on a loan means? I feel like that's why I got this question wrong.

[RuonanW40]

Wouldn't this question require us to bring in the outside knowledge of understanding what defaulting on a loan means? I feel like that's why I got this question wrong.

I think you dn't need to understand what is a default, a loan, and a mortgage.
If we worded in this way:
In general, the higher the credit score, the less the risk. However, in mortgage, the higher the credit score, the more the risk.
Correct answer choice must include something special or different with high credit score borrowers in mortgage loan situation. A is the only one that include this.

[JohnD151]

I have concerns about a loan I'm trying to get. The point is - I have a zero credit score and planning to get a house loan. A few banks already refused to give me money, but one loan company didn't refuse. Even more - those guys offer me a loan with very low interest - only 3%. And now I'm thinking - am I lucky or someone tries to deceive me? I'm talking about these guys: expertpaydayloans.com. One of my friends told me about them. He says, that he has already taken a credit from them and it was all ok. But I want some more information. What's the catch? Can they really give me a good loan if I don't have a credit score at all?

[CarmenB538]

Hi JohnD151. I think you should not worry about taking a loan. Given that your friend used the company you mentioned. In most cases, a poor credit rating is not a problem for receiving money. For creditors, the main thing is that you are able to pay the debt.
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[JinZ551]

Question Type:
Explain/Resolve

Stimulus Breakdown:

Answer Anticipation:
We're essentially thinking, "If lenders are correct to think that, in general, higher credit scorers are less likely to default, then why in the case of mortgage loans is it the opposite of that?" i.e., what's special about mortgage loans that leads to people with high credit scores defaulting a lot?



#officialexplanation

hi Patrick, when I was doing answer anticipation for this question, I came up with an idea different from the correct answer: maybe it is because MOST of the mortgage loan applicants are borrowers with highest credit scores?since mortgage loan is so big that prevents other borrowers to apply for it at the very beginning?

for example, there are 11 people borrowing mortgage loan from lenders, among them 10 are highest credit scorers, only 1 not highest credit scorer. If 2 out of 10 highest credit scorers default the loan, that would make a default proportion 20%, if the only 1 not highest credit scorer did not default the loan, then the default proportion for non-highest scorer would be 0%.

do you think this scenario can help explain the paradox?

[SherlynS569]

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[SophiaJ886]

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