What relationship existed between subprime mortgages and foreclosures when home prices fell?

Question

• The Federal Reserve lowered interest rates to avoid further foreclosures.
(1 point)

• The value of homes remained generally higher than the mortgage, so foreclosures decreased,

• Many people with subprime mortgages could not make their payments, so foreclosures increased.

• Banks offered more subprime mortgages to avoid further foreclosures.

Answer 1

The correct statement is:

Many people with subprime mortgages could not make their payments, so foreclosures increased.

When home prices fell, borrowers with subprime mortgages—often those with weaker credit histories or limited financial resources—found themselves in a difficult position. Many of these borrowers had loans with higher interest rates and less favorable terms. As home values declined, many homeowners owed more on their mortgages than their homes were worth (known as being underwater), leading to an increase in mortgage defaults and subsequently, foreclosures.