"Surprising" Phenomenon
There are higher default rates among mortgage borrowers with the highest credit scores than there are among other mortgage borrowers, even though higher credit scores typically correspond to lower risks of loan default.
Objective
The right answer will explain a key difference between mortgage borrowers with the highest credit scores and other borrowers. That difference must shed light on some factor that explains why the former group tend to have a harder time repaying their loans.
A
Mortgage lenders are much less likely to consider risk factors other than credit score when evaluating borrowers with the highest credit scores.
This is what we’re looking for! Mortgage lenders are much less likely to take the time to comprehensively evaluate borrowers with the highest credit scores, so they end up loaning to riskier people whose red flags would have disqualified them if the lender had looked closer.
B
Credit scores reported to mortgage lenders are based on collections of data that sometimes include errors or omit relevant information.
This doesn’t describe any difference between the highest-credit-score borrowers and the others. Because these inaccuracies presumably occur across the board, “B” doesn’t explain why a correlation that holds for most borrowers falls apart for those with the highest credit scores.
C
A potential borrower’s credit score is based in part on the potential borrower’s past history in paying off debts in full and on time.
Of course this is true! These factors play a huge role in a person’s credit score. But that’s true for every person at every credit score level, so nothing here explains why a correlation that holds for most borrowers falls apart for those with the highest credit scores.
D
For most consumers, a mortgage is a much larger loan than any other loan the consumer obtains.
Of course this is true! Houses are expensive. But this doesn’t point to a difference between highest-credit-score consumers and others, so nothing here explains why a correlation that holds for most borrowers falls apart for those with the highest credit scores.
E
Most potential borrowers have credit scores that are neither very low nor very high.
This seems quite plausible, but it doesn’t help us understand what’s happening for mortgage borrowers with the highest credit scores that’s different from what’s happening for other borrowers.