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Sue Troll, a credit analyst at T. Rowe Price, who in 2006 forecast the subprime meltdown, describes Option ARM mortgages as “subprime on steroids, with their underlying quality in many instances having been worse than subprime, despite involving higher-quality borrowers.” She says approximately 80 percent were low- or no-documentation loans — twice the rate for subprime loans — with significantly greater concentrations in the states experiencing the sharpest home price declines (California and Florida). Option ARM loans in those states also have longer maturities (up to 40 years), and lower teaser rates (initially as low as 1 percent) than typical subprime loans.

She estimates that $800 billion of Alt-A mortgages (including approximately $250 billion in Option ARMs) have been securitized. “Valuation of these securitizations,” Troll explains, “will remain very difficult, and most will prove to be worth only cents on the dollar.”