UBS Continuing On Subprime Path?
The motto for UBS these days seems to be “if at first you don’t succeed, try, try and try again.â€Â
After recently writing off billions of dollars on losses in the U.S. subprime lending market, UBS is again representing subprime securities backed by option adjustable-rate mortgages as a great value for investors.
Known as exotic mortgages, option adjustable-rate mortgages, or option ARMs, give borrowers flexibility in the way they meet their monthly mortgage payments. If borrowers decide to pay less than the monthly interest charges, the mortgage balance increases. If borrowers defer paying interest charges equal to 10% to 15% of the original loan amount, payments generally become mandatory.Â
The payment flexibility of an option ARM mortgage appeals to many homeowners, especially first-time buyers. But there’s a downside, as well. Interest-only or option-ARM minimum payments can be extremely risky if homeowners think they won’t be able to afford the higher monthly payments later down the road.
Moreover, option ARM mortgages can easily become “upside down,†meaning the mortgage balance is greater than the actual value of the house.  These kinds of mortgages are particularly dangerous when housing prices are flat or declining, not to mention their high potential for default when interest rates increase.
These facts make it all the more surprising that UBS says subprime securities backed by option adjustable-rate mortgages represent a “great value†for investors.  Even more surprising: UBS’ proclamation comes on the heels of Peloton Partners’ recent announcement that it was putting assets of its $2 billion flagship fund – the Peloton ABS Fund – up for sale in order to meet cash calls from its bankers, led by UBS, Goldman Sachs, and 12 other lenders.
Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage related investment losses.Â
