s. kroszner, 2007, “ recent events in financial markets, ” speech delivered at the institute of international bankers annual breakfast dialogue, october 22 ). the estimates in this paragraph are based on analysis of loan - level data from loanperformance by federal reserve board staff. over the preceding three years. another underwriting practice in the subprime mortgage market that can add to risk is the failure to escrow taxes and insurance, which can result in payment shock to the borrower if the borrower did not fully anticipate the costs of taxes and insurances on the property. these and other shifts in underwriting standards, coupled with slowing house price appreciation or even depreciation, are the most likely explanation for the pronounced rise we have seen in defaults occurring within a few months of origination – before most borrowers would have experienced significant changes in their payment obligations or in their financial situations. finally, another factor that could affect subprime delinquencies is the substantial payment increase often experienced at the first interest rate reset. for the most common type of subprime variable - rate loan, the so - called " 2 / 28 " loan, this reset occurs after two years, before which payments are typically based on a fixed below - market rate. in early 2007, the typical subprime mortgage experiencing a first reset had its rate increase from 7 percent to 91 / 2 percent, producing an increase of 25 percent to 30 percent in the monthly payment. this increase translates into an additional monthly debt obligation of $ 350 per month for the average subprime variable - rate mortgage. in the past, many subprime borrowers have avoided such payment increases by refinancing ; for example, about two - thirds of subprime 2 / 28s originated in 2003 and 2004 were terminated through a refinancing or home sale by the time of the first scheduled reset. prepayments on subprime variable - rate loans originated in late 2005 and 2006, however, have occurred at a slower pace, likely in part because the combination of sluggish house price appreciation and high initial cumulative loan - to - value ratios has left some borrowers with too little equity to qualify for new loans. prospects for subprime borrowers looking ahead, two considerations suggest that conditions for subprime borrowers have the potential to get worse before they get better. first, all indications are that housing activity is continuing to weaken. incoming data in recent

strategies to provide resources to assist borrowers confronting foreclosure. most recently, the federal reserve bank of chicago sponsored symposiums in chicago, indianapolis, and detroit to discuss factors contributing to increasing foreclosure rates and to highlight innovative intervention programs. another meeting will be held in waukesha, wisconsin, in december. in addition, the federal reserve and other banking supervisory agencies have issued statements in recent months urging both lenders and servicers to look for ways to work with borrowers having difficulty in meeting their mortgage loan obligations. 6 these statements note that prudent workout arrangements that are consistent with safe and sound lending practices are generally in the long - term interests of both the financial institution and the borrower. the september statement identifies prudent strategies for loss mitigation for servicers, including loan modifications, deferral of payments, extension of loan maturities, capitalization of delinquent amounts, and conversion of adjustable - rate mortgages into fixedrate mortgages or fully indexed, fully amortizing adjustable - rate mortgages. lenders and servicers generally would want to work with borrowers to avoid foreclosure, which, according to industry estimates, can lead to a loss of as much as 40 percent to 50 percent of the unpaid mortgage balance. loss mitigation techniques that preserve homeownership are typically less costly than foreclosure, particularly when applied before default. borrowers who have been current in their payments but could default after reset may be able to work with their lender or servicer to adjust their payments or otherwise change their loans to make them more manageable. comprehensive data about how many loan workouts and modifications have actually occurred are not available, but some reports suggest that the numbers may be limited thus far. one possible contributing factor is that many borrowers are not seeking help or advice from their lenders because they believe that lenders cannot or are not willing to help them. industry and consumer advocates who testified at our hearings on the home equity lending market last year told us that the greatest barrier to working with troubled borrowers is in simply making contact with them. these witnesses told us that lenders can reach troubled borrowers through trusted community advocates and that partnerships between community groups and lenders can reduce the number of homes lost to foreclosure. in addition, the analysis necessary to identify the best sustainable workout solutions that take into account the specific circumstances of individual borrowers can require a great deal of time and