Tuesday, July 17, 2007

2/28 Subprime ARMs no longer profitable

In a recent announcement issued by Option One, the lender informs its clients that it will eliminate all 2/28 ARMs effective Monday, July 16th. Anyone holding a 2/28 ARM that hasn’t adjusted yet gets a 3/27 product at no cost, thus receiving another year of fixed mortgage payments.

2/28 ARMs are 30-year hybrid mortgages that have fixed monthly payments for the first 2 years of the loan and begin to adjust afterwards. 3/27 loans have a fixed-rate period of 3 years.

In its statement, Option One says that news received on Friday suggested that rating agencies “have made significant changes to their loss coverage assumptions on subprime 2/28 ARM loans”. As a result, 2/28 ARMs “lost a great deal of their economic value”, and Option One decided to eliminate the product altogether. Option One will honor the approved rate on 2/28 mortgages that will be replaced with 3/27 loans.

It is possible that many other lenders will follow suit, because issuing loans that can’t be resold makes no sense to anyone. A sensible move amid the subprime mess at last. Apparently the ARM market in general is going to contract significantly in the coming months. So perhaps the market is, after all, regulating itself.

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