danryan.us

Let's start by organizing what we know.
What states can a housing unit be in? There are regular mortgages and subprime mortgages. Some subprimes are in their lower payment first five years, some are in the post five year larger payment zone. Mortgages can be in good standing or in default.

A Regular Good Standing
B Regular Default (problem suggests there are none of these)
C Subprime Pre-Adjustment
D Subprime Post-Adjustment Good standing
E Subprime Post-Adjustment Default
F For Sale

What transitions do we know about? These are not final numbers, just a first attempt to translate the above.
A > A 100%
A > B 0%
C > DorE 20%
C > D 20% x 67.7% = 13.33%
C > E 20% x 33.3% = 6.67%
C > C 50%

Any state > F 5%

Since nothing ever goes into state B we can just eliminate it.

A regular mortgage in good standing is likely to stay that way (95%) or be sold (5%) in this model.

A subprime mortgage, other things equal, also has a 5% chance of going back on the market. Of those that do not go on the market, assuming they were made at a steady rate, has a 1 in 5 chance of hitting its adjustable year and a 1 in 3 chance of defaulting when it does.

Each year, a subprime mortgage that is past its adjustment year has a 1 in 3 chance of going into default. Thus

Finally, based on the information we have, we should assume that all houses that are for sale will be sold and that there is a 1 in 4 chance they'll be sold with a subprime mortgage (our model implies that no one has woken up to the scale of the problem)

And finally we can put it all together like this: