Local lenders discontinue risky ARMs
By Joann Groff joann@theacorn.com

Local home mortgage lenders Washington Mutual and Countrywide announce they will stop offering the popular 2/28 Adjustable-Rate Mortgage.

The interest rate in the first two years of a mortgage is fixed, but adjusts immediately after that, usually upward. The loans can quickly become unaffordable after the two-year fixed period ends, according to the Association of Community Organizations for Reform Now.

"Due to the current market environment for subprime collateral, Countrywide is no longer able to offer subprime 2/28s," said a spokesperson for Countrywide in a statement. "The decision reflects substantial tightening of secondary-market demand for this product."

Maude Hurd, association president, said the lenders are moving in the right direction.

"This is a step towards protecting home buyers and homeowners from predatory loans, but there is more that needs to be done," Hurd said.

The association is only partially satisfied because some lenders are still offering 3/27 ARMs, with a fixed rate for three years. WaMu, however, discontinued both the 2/28 and 3/27.

"We're taking (an) important step to adjust our subprime lending products and practices for new customers to reflect the current difficult conditions- especially softening house prices," said Kerry Killinger, WaMu chairman and CEO. "Effective immediately, we are implementing new, industry-leading subprime mortgage lending standards. . . . We will not offer subprime adjustableratemortgage loans with initial fixedrate terms of less than five years, effectively eliminating the 2/28 and 3/27 products."

Killinger said WaMu will also require tax and insurance escrow accounts with all new loans, as well as full income documentation. Stated income loans, those without documention, have been discontinued.

The association called on all subprime lenders to state whether they will implement the recently released federal guidance on subprime lending, which calls for lenders to only make adjustablerate loans that are expected to be affordable after the fixed period ends.

"We have interviewed hundreds of borrowers who were given these ARMs, and none of them was ever given a choice about whether they wanted a fixed or adjustable rate," Hurd said. "In fact, many of them specifically asked for a fixed rate but were given an ARM instead. We've even talked to a lot of homeowners who didn't know they had an ARM until their payments went up."

The association represents more than 350,000 low and moderate-income families organized into 800 neighborhood chapters in 103 cities across the country.