Are subprime mortgage backed securities (MBS) and collateral debt obligation (CDO) problems likely to get worse?
Over recent months the business press has reported extensively on the nature and extent of problems attributable to the subprime mortgage market. These problems have had a swift and dramatic impact on many investments and losses already run into the billions of dollars. Unfortunately the problems in the subprime mortgage market will almost certainly get worse for several major reasons. First, over the next 18 months, the interest rates on hundreds of billions of dollars of adjustable rate first mortgages will reset to higher, in many cases much higher, levels. The higher mortgage payments resulting from these resets will place heavy financial burdens on subprime borrowers who are already financially strapped and will significantly increase the probability of default. The following table shows the approximate amount of first mortgages that will reset to higher interest rates in 2007 and 2008.
