I'm referring to the sub prime mortgage rate itself, pls correct me if my understanding is wrong.
I think most sub prime mortage borrowers take a floating package, which probably charge a lower interest rate initially (ard 4%) with annual adjustment upward to 10%+ eventually because of his bad credit history.
If the US housing market is booming, he might be able to restructure his mortage and take advantage of the appreciating asset price. But now, he could not do that; and the floating rate is keep hiking, with every hike the borrower needs to pay more interest. He may not be able to afford it and cannot sell the property and cannot refinance, that's why the default rate will go up.
Now, I think the fixed income market was hit badly, ... lower tranche of CDOs backed by sub prime mortgage become worthless, and two hedge funds have collapsed already, more are in trouble. Sub prime mortgage problem will definitely become bigger, but don't know how bad the problem will become.
Like speculatist and other people have mentioned, one problem is with the tightening of credit terms, companies are more and more difficult to raise funds. But still, I personally don't think it will shake the foundatoin of economy...
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