Certified Apartment Portfolio Supervisor (CAPS) Practice Exam - Module 2

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What can cause variations in Default Risk?

Type of loan and potential for property decline
Only the loan term
The interest rate alone
Only the borrowing party's income level

The correct answer is: Type of loan and potential for property decline

Variations in Default Risk are influenced by multiple factors, with the type of loan and the potential for property decline being key contributors. The type of loan can determine the terms and conditions under which borrowing occurs, affecting the likelihood of default. For example, adjustable-rate mortgages may carry different risks compared to fixed-rate loans, especially if market conditions fluctuate significantly. Additionally, the potential for property decline plays a crucial role in Default Risk. If the property value is susceptible to decline due to market trends, economic downturns, or changes in neighborhood desirability, the owner's equity may diminish. This situation can increase the likelihood of default, as borrowers might find themselves owing more on the mortgage than the property is worth. In contrast, focusing solely on the loan term, interest rate, or the borrowing party's income level does not capture the full complexity of Default Risk. While these factors can influence individual situations, they do not encompass the broader implications that the loan type and property value dynamics have on default probabilities. Hence, recognizing the interplay between these elements provides a more comprehensive understanding of Default Risk variations.