New York - As the most rapidly growing loan type within the home equity ABS sector, interest-only (IO) loans represent an X-factor for most in the market and only time will tell if the subprime borrower will be able to manage higher monthly payments upon reset, or refinance into a new mortgage prior to the reset period.

Analyst David Liu told a panel of investors that while IO product has outperformed all other loan types in the prime sector, IO loan evolution into subprime has set off red flags investors should be concerned with. The solid performance in the prime sector was credited more with the financial strength of the borrower, who was in turn taking advantage of the frontloaded interest payments. The subprime IO borrower, however, is showing some disturbing characteristics for the most popular type of IO structures.

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