WASHINGTON (Reuters) - Borrowers with tarnished credit were offered complex mortgages that often made it possible for them to get financing or lowered their monthly payments, but often contained hidden costs.
Following is a list of some of these types of subprime loans:
* The “2/28 loan” offered a low rate for the first two years that would then would jump by as much as 6 percentage points. Borrowers ideally could clean up their credit and refinance the loan before rates rose. That produced a second windfall for the broker, and triggered thousands of dollars in prepayment penalties for leaving the original loan.
* Interest-only loans engineered low monthly payments by postponing repayment on the principal. These loans grew from 2 percent of the market in 2000 to 25 percent in 2005, according to the Federal Trade Commission.
* The option ARM offered a low payment that didn’t even cover interest costs, leaving the borrower deeper in debt each month.
* Fixed-rate loans could be spread over 40 or 50 years, beyond the traditional 30-year period.
* Those who hadn’t saved for a down payment could take out two mortgages at once to cover the entire cost of the house.