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With a prime mortgage (a conventional loan), the down payment requirements can be relatively small, too — as low as 3 percent or 5 percent of the home’s price. The interest rates on subprime ...
CDS also allow particular credit risks to be hedged, as an entity can purchase protection from many sources of credit risk, much like an insurance policy. While total notional value related to CDS are enormous (estimated between $25–$50 trillion), the true exposure related to that notional value is approximately $2.5-$3.0 trillion.
Subprime I was smaller in size — in the mid-1990s $30 billion of mortgages constituted "a big year" for subprime lending, by 2005 there were $625 billion in subprime mortgage loans, $507 billion of which were in mortgage backed securities — and was essentially "really high rates for borrowers with bad credit".
This is even more apparent when the lifetime cost of the loan is considered (though most people will want to refinance their loans periodically). The total cost of the above loan at 5.5% is approximately $1,018,891.24, while the higher rate of 9.5% would incur a lifetime cost of approximately $1,366,390.93.
By refinancing, you’d save about $220 on your monthly payments and nearly $30,000 in interest payments over the life of the loan, and it would take you about three years to recoup the closing ...
In 2008, David Goldstein and Kevin G. Hall reported that more than 84% of the subprime mortgages came from private lending institutions in 2006, and the share of subprime loans insured by Fannie Mae and Freddie Mac decreased as the bubble got bigger (from a high of insuring 48% to insuring 24% of all subprime loans in 2006). [267]
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