Friday, 2 November 2007

Why subprime is going to get worse

First, many subprime mortgages are simply unaffordable for the mortgagee. As Naked Capitalism points out, the true interest cost for many buyers is more than 50% of their income:

Right now the full force of this has not been felt yet as many of these mortgages are in their teaser period where the rate is artificially low: the yellow shows the distribution of actual payments including the teaser rate, the blue what it would have been without the teaser. The current low rates change soon, however, as this picture of the notionals resetting by mortgage type shows:

As Stan might say, oops.

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