#19 - One of the things lenders do in evaluating the risk of

[Administrator]

Please post your questions below! Thank you!

[lathlee]

Hi. I am just lost for this q. doesn't d) explain both of opposing sides to coexist as well as answer choice A) can ?

[heyitsnixy]

Hi. I am just lost for this q. doesn't d) explain both of opposing sides to coexist as well as answer choice A) can ?

From how I understood it, I think A) is a better choice than D) because answer choice A) actually tells you what distinguishes the highest credit scorers from all other borrowers. In answer choice D, it tells you what makes mortgage loans different from other loans, but still fails to explain why the borrowers with the highest credit scores default more than other borrowers. For answer choice D), wouldn't everyone who takes out a mortgage loan have a higher default rate and not just those with the highest credit scores? So, A) is the superior choice.

[James Finch]

Hi Nixy,

Excellent work! (A) works as a cause for the anomalously high default rate on mortgages by buyers with high credit scores, while (D) would require another assumption to work and does nothing on its own to resolve the paradox, which is about rate of default.

Good job!

[HowardQ]

Hi, Doesn't answer choice A actually weakens the argument? I read A to be saying that lenders don't consider other factors once they see a high credit score. Once that happens, the sole indicator of whether default or not should directly correlate with the observed correlation which is not the case here. If we change A to say that Mortgage lenders are much more likely to consider other risk factors, that would resolve it because other factors may deviate from the correlation right? Is my reading of the material severely wrong?

Thanks

[Robert Carroll]

Howard,

There is no argument in this stimulus, which is fairly typical for a Resolve the Paradox situation. Thus, answer choice (A) cannot weaken the argument, because there is no argument.

If answer choice (A) made the truth of a particular fact in the stimulus less likely, that could be a problem, as it would be changing the situation rather than resolving the paradox. This isn't an issue here. We already know from the last sentence of the stimulus that mortgage loans do not follow the general correlation of higher credit score and lower risk of default. So we know the general correlation is violated in the mortgage case already. Answer choice (A) tells us why, filling in the information that helps explain the discrepancy.

Your rewriting of answer choice (A) would deepen the mystery, because it would be odd for mortgage lenders to consider other risk factors, and yet still get things wrong. I would need an explanation of that.

Robert Carroll

[ShannonOh22]

Hi guys,

Can someone please explain why B is wrong? If credit scores that are reported to mortgage lenders are based on collections of erroneous data, would that not provide an explanation to why these borrowers are defaulting despite high "reported" scores? I see A as another option, but I don't understand why it does a better job of resolving the paradox than B.

Thank you!

[Adam Tyson]

It's not that credit scores are based entirely on collections of erroneous data, ShannonOh22. It's that the data sometimes has errors in it. Those errors could be go either way - the errors might be artificially raising OR lowering the person's score. And while this might explain why some people with high credit scores may not be able to afford their mortgages, it doesn't explain why the ones with higher scores default at a higher rate than those with lower scores (you would think the opposite would still be true - lower scores mean higher risk which could mean more defaults).

Basically, answer B should leave us still wondering about the difference between the two groups, which is the real paradox here. Higher scores should mean lower default rates, but instead they correlate with higher default rates. A few errors in some of the data doesn't go far enough to explain that. We need some new info that shows us why people with higher credit scores are actually more likely to default, which answer A provides (the lenders are being careless about other risk factors - the high scores mask their deficiencies).

Put another way, the paradox is about the difference between the two groups . They are different in an unexpected way. Answer B tells us nothing about a difference between them - they are ALL subject to the same possibility of errors. A similarity cannot explain a difference!

[emilyjmyer]

Why is answer choice D wrong? I was thinking that if mortgages are much bigger loans than that may explain why the normal correlation of high credit score and low risk of default does not occur.

[Jeff Wren]

Hi Emily,

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.