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To assess the current subprime market you have to consider how we got here. Back in the 80s, ARM originations were on the increase as borrowers were enticed with teaser rates sometimes 125 to 200 basis points below prevailing fixed rates. This same phenomenon recurred a few years ago in the record refinancings of 2003 to 2005. In both cases, many borrowers were caught short when their loans repriced to levels which made it unaffordable. What is different in today’s current climate is unlike in the 80s when borrowers were required to put at least 20% down to qualify for their ARM, no down payment deals are common, doubling the adverse exposure to both lender and borrower.

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