Mortgage Lenders Cut Down on 2/28 Home Loans

A handful of lenders are eliminating what has been the most popular type of home mortgage loan for subprime borrowers.

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, said investors’ demand for such loans is “very, very limited.”

A spokesman for Wells Fargo & Co., the number-two 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 bad credit home 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.

Also Tuesday, federal and state banking regulators said they would step up their scrutiny of lenders that make home loans to people with shaky credit scores, focusing on companies that operate outside federal banking oversight.

The pilot program announced by the Federal Reserve, two other federal agencies and state banking officials is scheduled to start in the fourth quarter and affect about 12 mortgage lenders.

It will be designed to examine firms that account for the majority of subprime loans, a category that has experienced a surge of defaults in recent months.