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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.

Currently, subprime mortgages account for 55% of total ARMs but only 13% of total mortgages. Approximately 75% of all subprime mortgages were originated after 2003 (versus 86% of total mortgages outstanding). Currently, about 65% of homeowners have a mortgage loan, 75% of mortgage holders have fixed-rate mortgages and approximately 98.7% of all mortgage borrowers are current on their payments, so there’s considerable strength in the current mortgage sector of the economy.

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