23. The following are excerpts from a paper by Hans-Joachim Dbel and Marc Rothemund.10 For each excerpt,

23. The following are excerpts from a paper by Hans-Joachim Dübel and Marc Rothemund.10 For each excerpt, answer each question that follows it.

a. “Borrower selection policies have been generally less aggressive in Europe compared to the US; however, the claim that there have been no subprime practices in some European market would be incorrect” (p. 16).

Explain why the statement is correct.

b. “In Ireland, typical first-time buyer LTVs prior to the house price collapse were 95%, based on highly inflated house prices” (p. 17). What does this mean, and why would you expect these values to lead to higher defaults in Ireland?

c. “The quantitatively most relevant risk feature in Europe beyond the classic risk layering is the high empirical relevance of ARM lending outside the core of France, Germany, Belgium and the Netherlands, which carries large potential payment shock risk” (pp. 20–21). What does this mean?

d. “The index tracker boom of the 2000s has profoundly changed ARM markets, including in countries such as the UK and Ireland that primarily had used reviewable-rate ARM allowing lenders to control the variations and smooth the interest rate cycle. By 2007, those were almost entirely replaced by index trackers with extremely low spreads” (p. 21). What does this mean?