Today about 80 percent of all subprime loans come with adjustable rates. A majority of these are 2/28 mortgages, known as "exploding ARMs," which begin with a temporary low fixed payment, but then shift to an adjustable rate payment that rises dramatically . After the introductory low payment ends, the monthly payment on these loans jumps by 30 to 40%--a significant amount for any family. In addition, many of these loans come with expensive prepayment penalties--meaning the homeowner must pay thousands of dollars when forced to refinance to avoid the unaffordable high payments. To top it off, subprime lenders often approve these loans without considering whether the borrower can actually afford the loan when scheduled payment increases occur or even documenting the amount of the borrower's income.

All of these loan features--adjustable rates, prepayment penalties and limited income documentation--increase the risk of foreclosure significantly. In fact, our study shows that the risk on an ARM versus a fixed-rate mortgage is 72% higher. That's an increased risk regardless of the borrower's credit.