Baton Rouge Countrywide and several other companies involved in mortgage market from primes to sub-primes announced at the end of the week that they were abandoning the highly controversial mortgage product the industry refers to as 2/28’s. We applauded the change but with only one-hand clapping. ACORN, along with everyone else who has taken a hard look at this problem and some of the sketchy loans that the brokers and companies created from this product, has argued that affordability has to be the test with long term ability to maintain the payments on the loan.
The “2/28s” are adjustable rate mortgages that work this way: A “teaser” interest rate is used for the first two (2) years to bring the borrower into the product, but after the first two years, the rates are “reset” to a much, much higher “adjustable rate” that sometimes moves the payments on the loan to a level that the borrower simply cannot pay. There were many abuses in the sub-prime industry and the sales of these 2/28s that have triggered the foreclosure crisis which is unsettling our communities and much of the national economy.
In our excitement about the fact that some of the companies finally walked away from this train wreck, we almost didn’t read the whole announcement closely enough to see there was a catch. Mike Shea of ACORN Housing raised a flag though because at the end of the announcement it said that they were all sticking with a similar product, a “3/27,” meaning a teaser rate for 3 years (as opposed to 2) and then a reset at a higher, adjustable rate for the next 27 years. Wall Street according to the Journal made the gratuitous observation that this was good because fewer of the 3/27s were going below the waterline.
Amazing how little the industry is learning from their addicted belief in these marginal products which are now causing such wreck and ruin in our communities!
ACORN is clear. Question: What is the difference between a 2/28 and a 3/27? Answer: One lousy year!
Everything else is the same. A come-on is still a come-on. It is unclear that the industry has learned anything yet? For them it seems to all be about “packaging” and marketing. For us it about being able to buy a home and hold on to it! The industry seems to think on a wink and a nod that if they can get Wall Street to still buy the securities, then there really isn’t a problem at all.
How many of them are going to have to go under the way of New Century and how many of us are going to be tricked into marginal products and face a foreclosure fight before we get real reform in this industry?