What does risk layering in mortgage context refer to?

Risk layering in the mortgage context refers to the strategy of combining high-risk loan features to evaluate the overall level of risk associated with a mortgage application. This can occur when several factors that contribute to a higher likelihood of default are present at the same time. For example, a borrower may have a high debt-to-income ratio, a low credit score, and may be seeking a loan with an adjustable rate, all of which together significantly increase the lender's exposure to risk.

In this context, the focus is on understanding how individual risk factors can compound to create a more precarious lending situation. For instance, if a borrower already has a low credit score, adding an adjustable-rate mortgage could further heighten concerns about their ability to sustain payments as rates fluctuate. Therefore, lenders assess these combined risk features carefully to make informed lending decisions.

The other options, while related to mortgage lending, focus on different aspects. Lower interest rates and improving credit scores do not inherently relate to the concept of layering risks, as those aspects can actually minimize risk rather than combine it. Similarly, integrating loan types pertains more to loan structure rather than assessing risk combinations.