SAT Subject US History Practice Question 1143: Answer and Explanation
2. Mortgage-backed securities are
A. bundles of subprime mortgages traded like stocks.
B. low-interest loans offered to people with troubled credit histories.
C. another name for adjustable-rate mortgages.
D. recession-proof investments.
E. stable assets.
Correct Answer: A
During the housing boom of the mid-2000s, mortgage-backed securities, consisting of bundles of subprime mortgages, were traded around the world. They were not low-interest loans (B) but rather mortgages with adjustable interest rates that got higher after fixed amounts of time. Normal adjustable-rate mortgages (C) did not have the same ballooning interest rates as subprime mortgages. Because some customers who bought subprime mortgages had poor credit, mortgage-backed securities were neither recession-proof investments (D) nor stable assets (E).