Did someone turn the faucet off?

© Arthur Gahagan


Incredible things are taking place in the mortgage world of today. As I write this

in August of 2007 there have been changes made this year that may severely

hamper your ability to purchase a home in the very near future.

In the mortgage world there exists what is known as the “Prime Loans “and

the “Subprime Loans.” In the prime loan area the lenders deal with the “best

of the best.” The borrowers here are usually W-2 employees, have a stable and

provable income, and have been great renters, paying their rent on time, etc.

On the Subprime side you have those borrowers that have bruised credit, they

might be self-employed with a difficult time verifying income, or maybe haven’t

been the best of tenents.


In recent years, especially the boom times of 2003 to 2005, there existed a loan

program known as the 80/20 Combo Loan. It became prevalent throughout the

kingdom and was widely used by many to purchase their “dream” home. If the

transaction was structured properly, it was even possible to cover closing costs

through various legitimate means, and actually come to the closing table with

very little out of pocket monies. After all, houses had always risen in value, right?

Sadly some have come to realize the fallacy of that comment. At one point in those

years I speak of, these 2/28 and 3/27 ARMs as they were known as, were the popular

choices of the day.

As of this writing today, it is difficult to find lender’s that will still offer them. Most
of the big players have dropped them like “ hot potato’s” and this at a time when

over half of the subprime borrowers would prefer that type of loan. The lenders

have dumped the programs as they view these loans as the “culprit “ that has

brought about the difficulty in the Subprime arena today. Since the start of this

year there are far fewer lenders in business than when the year started. If you are

paying attention at all, you know there is a huge mess on Wall Street. At this

point few are ready to mention the “r” word, but I will.


You see, in my opinion housing has carried the day for the economy in recent years.

It is not carrying the day now in many sectors of the country. This entire cycle

began back about 10 years ago and for reasons too numerous and complicated to

be mentioned here. The final sentences of this article will deal with the title,

“Did someone turn the faucet off?”

The reality is that the faucet has actually been turned off twice. The first time took

place at the end of 2005 and early 2006 when the investors and speculators had to

leave the market when the buyers decided that they couldn’t pad the seller’s

pockets to the tune of thousands and thousands of dollars of profits in a short time.


Then in certain areas of the country the builders flood the market with their new

inventory, priced below the market and used homes and the prices begin to recede.

Anyone know of that happening in an area near you?

In the past few months the big player’s ( lenders ) have turned the faucet off for the

80/20 Loans or 2/28’s and 3/27’s as some people refer to them.



80/20 COMBO LOAN

The example I will use to explain how this program works is to say we have

agreed to purchase a house for $100,000.00. We don’t have much money

saved and we decide to take advantage of this novel program. We are offered

a loan for $80,000.00 on what is known as a 2/28 ARM. The ARM standing

for Adjustable Rate Mortgage, which means adjustments can be made to the

payments either up or down based on certain criteria spelled out in our loan

paperwork, after the first 2 year period. This is a 30 year term by the way, thus

the second /28 after the fixed two year period. The second twenty eight year

period meaning your payment is adjustable at certain intervals spelled out

in your loan documents.


We may or may not catch the fact that in our loan documents, we’ve agreed to a

2 year pre-payment penalty. This means if we pay off the loan before we have made

24 payments we will have a stiff financial penalty for doing so. If we get in trouble,

lose our job or whatever, and our house doesn’t go up much in value, it could be

very costly for us to try and get out. We might be what is known as “upside down.”


Our $80,000.00 first lien loan represents our 80% of the purchase price and we’re

okay with our payment and our 7% rate ( even though it might go up ) later and

we have also agreed to the terms for our $20,000.00 ( the 20% portion ) of the

purchase price but this loan is known as a 30/15 Fixed Interest Loan.

We are not too thrilled with the fact that our interest rate on this loan is set to be

12.75%, but that’s okay because it is figured at a 30 year term ( to keep our

payment down ). The second part of the 30/15 is the 15 and that means our loan is

due and payable after 15 years. Notice that for the purpose of simplification here, I

have not mentioned anything about APR’s and how they are calculated. Our only

purpose here is information to make you aware.


Many of the loans I’m familiar with were known as a 3/1/6 type of 2/28 ARM.

This means there could be a rise of 3% to your 7% initial interest rate, and if your

loan documents called for it, this could be for the first 6 month adjustment period

after your initial 2 year period. The 1 meaning that other increases could be 1 %

higher at the next adjustment period, and the 6 meaning you had a lifetime cap

of no more than 6% above your starting rate. None of this or all of this could

happen. It is always wise to seek legal help in any undertaking

All ARMS are not created equal, and from here on out, might not be created at all.

You need to get familiar with terms like “index”, “margin”, LIBOR, etc.

Arm yourself with information. Be aware of what’s going on. The explanation

above left out many technical terms that come into play but I think you have

an understanding of how they work. If you need more info, let us know.



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