- Wed Oct 19, 2022 12:46 pm
The first step in solving a Resolve the Paradox question is identifying the paradox and understanding exactly why it seems like a paradox. Here, the paradox is the difference between the general trend of higher credit scores correlating with lower default risk and the specific exception of mortgage loans, where higher credit scores actually default at a much higher proportion.
The correct answer has to address this difference, not just how mortgage loans are different than other loans in a general sense, which is what Answer (D) does, but specifically why that would make mortgage borrowers with higher credit scores more likely to default rather than less likely, which would be expected.
The problem with Answer (D) is that it applies to "most consumers," so if the implication is that the fact the mortgage is a much larger loan explains why there is a higher default rate, why would that only apply to those with higher credit scores? In other words, other mortgage borrowers with lower credit scores should be at least as likely to default based on Answer (D).
Answer (D) is an example of one of the wrong answer traps for Resolve the Paradox Questions, specifically an answer that describes a similarity between the relevant groups when what we need is to explain a difference between them.
Answer (A) explains how mortgage borrowers with higher credit scores are treated differently than other borrowers in that they are basically given a "free pass" to borrow and the lender doesn't look at other potential red flags/risk factors. This "special treatment" has apparently backfired and that explains the paradox.