Go to home page

By HOLDEN LEWIS

bankrate.com Scripps Howard News Service

Lenders have abruptly stopped offering the most popular type of subprime mortgage, cutting options for credit-challenged borrowers.

"Many borrowers are not going to be able to refinance," says Deborah Goldstein, executive vice president of the Center for Responsible Lending. The consumer watchdog group has criticized loose standards for subprime mortgages, which are home loans for people with problem credit--generally, with credit scores below 620.

Over the past few years, the most common type of subprime loan has been an adjustable-rate mortgage known as the 2/28 ARM. Since mid-July, five of the six biggest subprime mortgage lenders stopped offering 2/28 ARMs. Suddenly, there's a shortage of the type of mortgage preferred by about 60 percent of subprime borrowers.

A 2/28 subprime ARM has a low initial rate that lasts two years. After that, the loan resets, which means that the rate is adjusted upward. At the first jump, the rate can climb 2 to 6 percentage points, causing monthly payments to skyrocket.

Mortgage brokers and loan officers say borrowers who need to refinance their subprime mortgages still have options--just not as many. Some lenders still offer 2/28 and 3/27 ARMs, although the rates might be high. Some lenders offer 5/25 ARMs and 30- and 40-year fixed-rate subprime mortgages. "Expanded approval" loan programs allow lenders to offer Fannie Mae-approved loans to people with blemished credit--but borrowers have to document their incomes, pay principal as well as interest, and, in most cases, pay mortgage insurance.

Back to top