The U.S. Subprime Mortgage Crisis under a microscope: Neoclassical Approach or Behavioral Approach?
"AMY GOODMAN: Lionel Ouellette, you organize homeowners, tell us some of their stories.
LIONEL OUELLETTE: One of our members, a Latina first-time home buyer, 760
credit score, which should make here eligible for the best loan products out there, got a subprime of 2/28, which is a loan that was fixed for two years, adjustable for
twenty-eight, and with a balloon payment. 760 credit score should have the best
product available. She lives in an apartment, and not even in the house, because she can get an apartment cheaper and still have extra money to help pay the mortgage on the house that she owns. And she’s hoping to refinance, to do something before it adjusts in 2008.
JUAN GONZALEZ: And when you say a 2/28, can you explain? These interest rates jump phenomenally, right? Could you talk, the difference, what it means in terms of an actual payment suddenly after two years?"
……
http://www.democracynow.org/2007/11/29/minorities_hit_hardest_by_subprime_mortgage
Overall, the message conveyed in this quote can be structured as a two period model. In the 1st period, the fixed-rate payments, which apply the same interest rate towards monthly loan payments for the first two months, are generally lower. In the 2nd period, however, the payments are uniformly higher, and the interest rates for the remaining 28 months are adjustable. The balloon payment occurs in the 2nd period. In the situation described above, it is assumed that the buyer can make all the payments in the 1st period. However, based on current income and assets, she will be unable to repay in the 2nd
period.
