Differential default risk among traditional and non-traditional mortgage products and capital adequacy standards

► 2/28 and option ARMs are more risky than FRMs. ► There is such a high probability of a liquidity shortage for many types of loans. ► There is such a high probability of default for many types of loans. ► More risk-based capital needs to be allocated to ARMs than to FRMs. ► The Basel II rule understates the default risk associated with NMPs.