Washington Mutual Inc. , the largest U.S. savings and loan, has become the latest home lender to eliminate some of the riskiest mortgages to borrowers with scuffed credit or heavy debts.
Effective immediately, the Seattle company will no longer offer subprime mortgages that carry fixed rates for the first two or three years and then reset to higher market rates. Those loans, also known as 2/28 and 3/27 subprime loans, pose higher default risk as the housing slump makes it harder for financially stretched homeowners to refinance or sell their homes.
WaMu will also require subprime borrowers to provide full documentation. Over the past two years, heightened competition has led home lenders to peddle so-called stated-income loans – under which borrowers have to disclose their income but aren’t required to provide verification. The skipped paperwork, however, has contributed to higher default rates as some borrowers overstated their financial strength in order to get loans to buy houses they really can’t afford.
“I want to emphasize that we remain committed to providing subprime loans to creditworthy borrowers,” WaMu Chief Executive Kerry Killinger said in remarks prepared for its earnings conference call after the market close Wednesday.
Fitch Ratings on Wednesday said that it will sharply increase its assumed level of U.S. adjustable rate subprime mortgage defaults, possibly more than doubling estimates, amid expectations that credit quality will worsen further.
The revision applies to adjustable-rate mortgages after the current two-year or three-year year fixed interest rate expires. Rates on $335 billion of such loans are slated to reset in the next 12 months, according to Fitch and Loan Performance data.
Interest rates on many subprime loans can surge by 6 percentage points or more after the fixed period ends, creating a “payment shock” that many analysts expect to worsen already high delinquency rates.
“We will be increasing our post-reset default rates by as much as 150 percent” in making judgments on ratings, he said.
Delinquencies on subprime ARMs originated just last year by June have already risen above 10 percent, according to Credit Suisse data. Older subprime ARMs are going bad at a rate of 15 percent or higher.
So-called “2/28” and “3/27” loans that have fixed rates for two or three years and are adjustable thereafter are the bulk of subprime mortgages.
Lenders no longer offering 2/28:
Washington Mutual (WaMu)