Option One Eliminates the 2/28 Subprime ARM Loan

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In an amazing development Option One has eliminated the 2-year fixed subprime ARM loan from its lending portfolio.Â The 2/28 as it’s known in the industry was the staple of subprime refinance options during the recent run-up in housing.

The elimination of this product from a former leader of the subprime world is a positive step to reducing the effects of exploding ARMs on borrowers who often leveraged themselves to the hilt borrowing on a short-term teaser rate.

I wonder if others will follow suit and how quickly it will happen.Â If you’ve seen the effects of ARM resets and their role in foreclosure you have to think this is a step in the right direction for the industry.

Here is the full text of the announcement from Option One:

Option One Announces an Exciting Product Change That Benefits All Borrowers with 2/28 ARM Loan Applications Currently In Our Pipeline

As you know, the subprime mortgage industry continues to change rapidly. At the end of June, we saw the release of final Interagency Guidance, which among other things, will lead to a change in the way all lenders underwrite 2/28 and 3/27 ARMs. Last week, Moody’s and S&P announced downgrades of subprime bonds. Although the downgrades were negative for the subprime market in general, we were very pleased to see Moody’s report that their data reflects Option One collateral is performing better than average, relative to our peers. Quality performance for a wholesale lender begins with quality brokers, so the Moody’s data reflects as well on you, our Option One customers, as it does on us. For that, we’d like to thank you.

The latest news impacting our industry, which we received this past Friday, is that the rating agencies have made significant changes to their loss coverage assumptions on subprime 2/28 ARM loans. The net result of this is that subprime 2/28 ARMs lost a great deal of their economic value over the last five to 10 business days. The loss in value is significant enough that we made the decision that the best thing for us to do is to eliminate our 2/28 ARM product and give you and your borrowers the benefit of longer fixed periods on ARM loans, with no extra cost to you or your borrower.

We want you to know that we will honor the approved rate on all 2/28 loans you currently have in our pipeline, but fund them all as 3/27 ARMs. This means your borrowers will all get an extra year of the low fixed rate for free. For those loans in the pipeline that have prepayment penalty periods, we will leave them all at 24 months or less. This means your borrowers will not only get an extra year at a low fixed rate, they will also get at least one full, penalty-free year before their first adjustment date. This is an excellent deal for your borrowers.

Elimination of the 2/28 ARM is the only change to our product menu and is effective Monday, July 16, 2007, at 8 a.m. ET, contact your Account Executive with questions.

New Submissions to Option One(www.OptionOneBroker.com)

Please note that although this decision is effective immediately, there will be some lag times for OOMC systems to be updated by Monday with this information due to technology constraints. The rate sheets however will be updated with the correct information

Please Note that the 2-Year ARM will still appear, in the short term, as a loan option, however it will get countered with either a 3-Year or a 5-Year ARM product

Select either the 3-Year or 5-Year options, as an alternative to the 2-Year ARM product

A condition will also be displayed on all Prequals/Broker Website submissions alerting the broker that OOMC no longer originates 2-Year products

Any 2-Year options selected through automation (BW or PQ) will be converted to either a 3-Year or 5-Year program based on the borrower’s need

Option One will be moving quickly to remove the 2-Year product option from the Prequal and Broker Website applications as soon as possible and apologizes for any inconvenience that this may cause

As the industry evolves, our customers can continue to depend on Option One Mortgage for a variety of loan programs, experienced Account Executives, and premiere service

Please contact your Account Executive with further questions.