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 16^th. 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.

Spike in mortgage rates

Rates on 30-year fixed mortgages rose again in the week ending May 31, 2007. The 30-year fixed-rate mortgage averaged 6.42%, up from 6.37% a week ago. 15-year fixed-rate mortgages climbed up as well, to 6.12% from 6.06% last week. 5-year hybrid adjustable-rate mortgages were at 6.19%, up from 6.02%. The 1-year adjustable-rate loan was the only type of mortgage to decline, with an average of 5.57%, down from 5.64%. Last year this time, the 30-year mortgage rate was 6.67%. 15-year fixed-rate mortgages and 5-year adjustable-rate loans carried an interest of 6.26%, and 1-year adjustable-rate loans were at 5.68.

Freddie Mac attributed the rise in interest rates to improving business and consumer spending, which are signs of a strong economy – outside of the housing market. Rates are currently at the highest level in 8 months.

Whatever the reasons, rising interest rates bode nothing good for the housing market. With higher mortgage rates come bigger monthly payments, which means that fewer buyers will be able to afford new homes. Considering the already existing glut on the market, a recovery in the near term seems impossible. The National Association of Realtors and the MBA pushed back their forecasts for a rebound in the Real Estate industry from mid-2007 to early 2008.

Mortgage activity: Freddie Mac reports mixed trends

Preliminary estimations of December’s financial indicators show signs of steady growth in the economy; the final reports are expected next week. Mortgage rates have shown mixed activity, with the 30-year fixed rate rising since last week and one-year and hybrid ARMs declining. All rates are somewhat higher compared to last year’s indications, the 30-year fixed-rate mortgage reaching 6.25 – the highest level since November, vs. 6.12% this time last year, and five-year ARMs at 6.00 vs. 5.75 in January 2006. The 15-year fixed-rate mortgage remains unchanged since last week at 5.98%.

The government report on the economy’s performance during the last 3 months of 2006 will be released next week and it shall point a direction for the interest rates activity.