WaMu, the nations largest Savings & Loan, is going to stop issuing certain risky types of subprime loans.
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.
Providing loans to people who can’t offer income documentation is irresponsible, and we’re pleased to see these reforms being made… even if it is a bit late.
According to analysts, it’s also important that lenders take into account the full amount that borrowers will need to pay per month when determining if they can afford the loan… this seems self-evident, but it’s not always done.
According to Marketwatch, fully 1/3 of 2-year “teaser rate” borrowers wouldn’t have qualified for their loans if the larger interest rate had been considered.
Washington Mutual to stop offering certain subprime loans [MarketWatch]