Credit tightening in action
They have been a staple product of the subprime industry for years. The typical model has been for someone to get a 2/28 mortgage, "repair" their credit by paying their bills on time during the 2-year fixed period, then refinance into a new loan (preferably, a prime quality one). But rising delinquencies across the board and tougher ratings agency attitudes toward subprime mortgage bonds have caused funding for these types of loans to start drying up.
New federal guidance also stresses that subprime lenders should qualify borrowers on fully indexed rates and payments (that is, the rates/payments they would have to pay AFTER the initial, subsidized period ends). That's another reason we're seeing lenders eliminate short-term subprime ARMs. Washington Mutual did so a few days ago.