Morgan over at the Blown Mortgage blog has posted a notice sent out today by Option One to its brokers, which says the company is doing away with 2-year adjustable rate mortgages for subprime borrowers. According to the company letter, Option One said that the move has been dictated by the rating agency frenzy I’ve blogged about here in the past week or so:

The latest news impacting our industry, which we received this past Friday, is that the rating agencies have made significant changes to their loss coverage assumptions on subprime 2/28 ARM loans. The net result of this is that subprime 2/28 ARMs lost a great deal of their economic value over the last five to 10 business days. The loss in value is significant enough that we made the decision that the best thing for us to do is to eliminate our 2/28 ARM product and give you and your borrowers the benefit of longer fixed periods on ARM loans, with no extra cost to you or your borrower.

The implication here is that originating the 2/28 product is no longer profitable, given the repricing forced on Wall Street by rating agency cuts to RMBS securities. If so, I’d expect to see numerous lenders follow Option One’s lead and pull this product off of their offer sheets in the next few weeks.