Asked by joseph onuorah on Jun 27, 2024
Verified
For a mortgage lender that makes mortgage loans to borrowers,which one of the following would be an example of adverse selection?
A) After the loan has been made,individuals become careless with their finances
B) Individuals most likely to default are the ones most likely to apply for the loan
C) Borrowers investing their loan proceeds differently than the bank requires
D) None of the above
Adverse Selection
A situation in markets where buyers or sellers have information that the other party does not, leading to suboptimal market outcomes.
Mortgage Lender
A financial institution or individual that provides funds to borrowers for the purpose of purchasing real estate, which is secured by the property being bought.
Default
Failure to fulfill a financial obligation, such as not making scheduled loan payments, leading to potential legal consequences or credit score impact.
- Understand the concept of adverse selection and its implications on markets.
Verified Answer
Learning Objectives
- Understand the concept of adverse selection and its implications on markets.
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