Consumers Bamboozled by Crafty Subprime
Strategist's "2/28 Fixed" loans - which were
highly volitile & only briefly "fixed"

"With double the standard margins on adjustables on vast numbers of loans, many loans were set to go past 9% even if the market rates went down".
Qualifying for a mortgage is no longer automatic for those with good credit and income. Today's credit analysts are downgrading stocks that are heavily invested in lending. Even non sub prime borrowers are being turned away when they seek to refinance formerly 100% and 95% loan to value loans. The equity just isn't there from one to two years ago. Unless they are willing and able to go out of pocket, the loans cannot be refinanced. If they are adjustable they may be facing large payment spikes. Unwarey consumers have taken two year adjustables based on the following: 1) They were called 2/28 fixed rate loans. They are not fixed past the 2nd year, and the 28 year part of the phrase is where homeowners are finding themselves now. Twenty eight years of mortgage rates pre-set to increase - regardless of the current economics and interest rates in the market place. Some homebuyers are just settling in at the point in which their payment goes up. 2) They did not know it was an "artificially low teaser rate". This is because they were similar to fixed rates at the time.. However they were not fixed, or standard variable programs... They were instead pre-set to go up with or without a market rate increase. The mortgage loans were set to increase at amounts that would have shocked the consumers, had they known how to read the fine print.. 3) Most did not know how to add the index to the margin to compute the FULLY INDEXED RATE. This is how they could have found out what the rate would go to, in an identical market situation at the time of application, therby allowing them to properly compare the rates to typical adjustable rate loans.

Many of these 2/28 adjustables were far outside of the norm. Typically variable rate loans were a pre set margin (added cost) to a widely used and fluctuating market index. To be fair to a consumer the index is not an arbitrary number but instead typically based on a widely used economic index such as the 1 Year T-Bill (averaged monthly, yearly etc), or the 11th district cost of funds. They are outside of the control or influence of the lender and reflect the true cost of money to some extent for that given time period.

It is in the margin that the lender negotiates and determines his profit. Typically the margins were 2 to 2.75% over the index. However upon reading the fine print, these new loans bear extraordinarily high margins of 3, 4 and even 5%! Add that to the index to yield the fully indexed rate. This amounts to loans starting out at perhaps 5.5% and within 24 months, going to 8 or 9 percent even if rates were lower later at the adjustment time. That is because the rates have such tremendous margins. The rates began accelerating on homeowners as soon as the rate caps will allow for the adjustment, which in most cases is every 6 months after the first 24 months. Another boon for sub prime bankers!.. (Provided they do not cause record defaults with this chicanry).

Even disclosure requirements were seldom met, as "counter offers" were presented to consumers just prior to closing. On purchases, a consumer rarely wants to hold up a seller & typically would feel pressure to close, feeling they could refinance later if needed.

The standard practice of offering the borrower a true written commitment of terms, (as opposed to changing "pre-qual letters" was largely ignored for the past ten years, beginning a trend from back in 1996 when sub-prime was in it's hay-day. Looking back Pacific Thrift & Loan the most agressive of sub-prime lenders was offering loans to consumers currently in default, for loan amounts of up to 70% of their homes value. They achieved this by partnering up with high risk finance companies who offered the extra 5% loan called a "piggy-back" on top of the then industry standard 65% loan to value. The rates exceeded 12% -15% & were given to borrowers who were behind on 8% payments. Finally Merrill Lynch pulled the plug on the 100M warehouseline and the company folded. The 135 member team went over as a pack to Fremont Investment & Loan who had been considering buying PTL for 50M, & created similar loan programs for a number of years. PTL & Fremont are both closed. In their stead, came New Century, WMC, BNC, American Home Mortgage, Argent Funding, while existing well funded Long Beach Mortgage (Wamu owned) & Option One (HR Block owned) flourished.

This prescription for disaster will result in devaluation of the housing market as defaulting home owners flood the market to sell. Many are making an effort to sell unaffordable homes loan they cannot refinance. However increased supply will decrease values in many communities. This will make it harder for other families to refinance as they may no longer meet the Loan to Value requirements they had when buying or borrowing a few years prior. To make matters worse the Lenders no longer have the ability to loan at the same terms and high Loan to Values such as 100% or 95% for the same credit grades and situations. Their own capital markets are drying up. To see the drama play out visit ML-IMPLODE.com


These crafty schemes were not the brainchild of the mortgage brokers or small mortgage bankers or the S & L's of New York.... but in most cases big National Subprime Conduits, based in various states, & often securitizing and or obtaining warehouse lines here on Wall Street. These profit monger stratagists will contribute to significant defaults. Many of these subprimers some of which are now closed (with CEO's enroute to Belize) will be wondering if they can continue to fly under the radar while blaming Washington, Iraq, Oil prices, Homeowners & Mortgage originators.. Film at eleven.