The Mortgage Curmudgeon
The most commonly used mortgage in the subprime market is the 2/28 ARM. This is an adjustable-rate mortgage on which the rate is fixed for two years, and is then reset to equal the value of a rate index at that time, plus a margin.
Because subprime margins are high, the rate on most 2/28s will rise sharply at the two-year mark, even if market rates do not change during the period. This means that while the loan is affordable to the borrower at the initial rate, it may not be affordable after two years when the rate is reset.
My question is how much of the problem in the sub-prime industry was not caused by sub-prime loans per se but by the fraud that was common when applying for sub-prime loans? I’m thinking of no-doc loans, nicknamed “liars loans.”