Came across this chart from the ‘Profits and Balance Sheet Developments at U.S. Commercial Banks in 2008‘ Although the basics of this presentation are well known. I saw the following chart that I thought was interesting. It shows sub-prime and prime mortgage delinquencies by fixed and variable rate. I find it interesting that variables rates are so much worse than fixed (it would be interesting to know what portion of the delinquencies were driven by resets in interest rates within the variable rate category).
This divergence is likely -in part- due to the ‘other’ (read junk) being inside of variable category but even if that attribution was accounted for I suspect the breakout would be striking. Why does this happen, if the choice between the two products is simply a bet on interest rate paths? Is is that those who can’t qualify for fixed can qualify for variable and if so why? Is it that the less educated (and thus less robust) are being pushed toward variable rates which pose a different set of risk (which I would argue are riskier for the HHs) than fixed?
