Lenders Eliminate 2/28 Sub Prime Loans

Wells Fargo & Co. has followed Countrywide Financial Corp., Washington Mutual Inc. and Option One Mortgage in no longer offering 2/28 loans - which represented roughly 65% of all subprime mortgages in 2006 - in response to pressure from regulators and recent downgrades of their subprime bonds by ratings agencies.The San Francisco-based bank announced that it halted retail offerings of the popular loan product as of last Friday.Unless the loan is refinanced, borrowers with a 2/28 loan will have the adjustable-rate mortgages (ARM) adjusted twice a year for 28 years following two years of an initial fixed-rate period.For many borrowers, such a loan seemed to make sense during the housing boom years, but soon became burdensome with rising rates and a cooling home market – leaving them with a home they could neither afford nor sell.In recent months, regulators have been increasingly critical of these loans following the onset of a flood of delinquencies and foreclosures.The decision to eliminate the 2/28 product follows the issuance of a lending guidance from the Federal Reserve and other federal regulators that urges banks to qualify borrowers based on the highest rate the loan could incur after it resets, rather than the lower initial rate.Another factor in the decision was the recent deluge of downgrades on subprime bonds by several ratings agencies in response to the higher delinquency rates."These changes are being made to align our practices with industry guidance, as well as appropriately respond to recent downgrades by key ratings agencies regarding subprime bonds," said Wells Fargo in a statement. Washington Mutual reported it would no longer offer subprime adjustable-rate mortgages with initial fixed terms of fewer than five years, a move that would eliminate 2/28 and 3/27 loans.Countrywide, Option One, and Merrill Lynch's First Franklin Financial unit also announced they would sharply limit or discontinue the offering of 2/28 subprime loans.Retail or third-party lender for Wells Fargo have also ceased to offer one-year ARMs and some 40/30 adjustable-rate mortgages.Posted on Tuesday, July 24, 2007 by staff