Official Solution:Community spokesperson: After a recent surge of foreclosures, many homes in our community are vacant and falling into disrepair. Property values are already falling, and, if action is not taken quickly, will fall even further when panicked residents begin to leave. Clearly the only way to prevent a snowball effect is to make it easy to purchase these vacant homes by offering potential buyers special mortgages with a low interest rate for the first two years. Which of the following, if true, represents the most significant potential problem that could arise with this plan ?A. Interest rates in the area are already at a 5-year low, and it would be foolish of lenders to lower them even more.

B. Crime rates in the area have risen by 1% in the last year, making it less likely that potential buyers will be interested in moving to the area.

C. Most residents have lived in the area for over 20 years and do not want to leave their homes.

D. Low interests rates will likely attract buyers who will be unable to make payments when the interest rate goes up after the first two years.

E. There are few mortgage brokers in the area, making it unlikely that there will be enough personnel to assist a rush of potential home buyers.

Situation: A community spokesperson proposes offering easy mortgages to home buyers to attract them to a community where foreclosures have left many houses vacant.

Reasoning: Which identifies the biggest flaw in the plan to attract potential buyers? The community spokesperson is concerned that vacant homes will cause property values in the neighborhood to fall, and is looking for a permanent solution. The proposed solution would attempt to reverse the problem by making it easier for potential buyers to purchase vacant homes. If, however, mortgages are given to people who will be unable to make payments when interest rates rise after the first two years, the neighborhood will see even more foreclosures and vacant houses, and

the snowball effect will only have been delayed.

- This may be true, but is not the most significant potential problem.
- Though crime rates are a concern, this option does not directly address a potential problem with mortgages.
- Whether or not residents want to leave their homes is irrelevant to the soundness of the plan.
- If vacant homes in the area are purchased primarily by people who will only be able to afford their mortgage payments for the first two years, then after than time period, another series of foreclosures will leave the homes vacant once again.
- This option does not directly address the soundness of the plan to offer low-interest mortgages for the first two years.

Answer: D

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