All of the following weaken the claim that PMI charges accurately refl

QUESTION

All of the following weaken the claim that PMI charges accurately reflect the risk of loan default EXCEPT:

A) The cost of private mortgage insurance goes up as the size of a mortgage increases.
B) Well-informed buyers can avoid paying PMI if they are aware of loan products that divide up their mortgages into smaller pieces.
C) PMI is charged when a financially secure buyer’s down payment is under 20 percent even if the amount borrowed is small.
D) PMI is not charged when a financially insecure buyer down payment is 20 percent or higher and the amount borrowed is large.
E) Homebuyers continue to pay PMI until they own at least a 20 percent equity stake in their house, at which point, PMI charges drop to zero.

ANSWER

Answer: A
Explanation: A) All the choices point out flaws except Choice A. PMI is supposed to insure against risk, so it makes sense that the price of PMI goes up with the size of the loan. Choice B suggests that savvy buyers can avoid PMI, which makes PMI charges sound like a less reliable measure of risk. Choices C and D point out situations in which PMI isn’t a good indicator of risk: a low-risk case in which PMI is not charged, Choice C, and a high-risk case in which PMI is charged, Choice D. Choice E points out another problem—charges stop completely when equity rises to 20 percent. It’s hard to believe that the risk drops to zero at that exact moment, so Choice E suggests another way in which PMI is not a good measure of risk.