Lenders No Longer Funding 2/28 Loans

It is getting harder and harder for people with less than stellar credit to get loans. The Fed is lurking and has pushed many Lenders to tighten their lending restrictions.

But now Investors, the driving force in the Mortgage Marketplace are seemingly unwilling to invest in these kind of loans.

Recently the Strib reported that:

Countrywide Financial Corp., Option One Mortgage Corp. and Merrill Lynch's First Franklin Financial unit told employees and mortgage brokers this week that they would no longer offer so-called 2/28 subprime loans, ones that carry a relatively low fixed rate for the first two years and then jump to a much higher, floating rate, often more than 10 percent.

A spokesman for Countrywide, the nation's largest home-mortgage lender in terms of lending volume, said investors' demand for such loans is "very, very limited." A spokesman for Wells Fargo & Co., the No. 2 mortgage lender, declined to comment on whether it was still offering 2/28 loans. Some industry executives believe such loans will become rarities.

Lenders sell most subprime loans to packagers of mortgage-backed securities and thus typically offer only loans that investors are eager to buy. Investors have soured on 2/28 loans over the past few months because of a surge in defaults. At the same time, regulators and rating agencies are pushing lenders to be more conservative in granting loans.

While I think people are probably doing themselves a disservice with these kind of loans, what isn't being reported that for some buyers this is the only option. After 2 years they often find themselves in a much better position whether through increased income or just improved credit, which allows them to refinance out of the 2/28 loan and into something better.

The 2/28 has given many people a much needed foot in the door. With this on the outs, more and more people will likely be left out in the cold...