Isn't it time to just ban ARM loans outright?
Filed under: Real Estate, Mortgage Confidential
On Monday, Freddie Mac reported that 97% of prime borrowers who refinanced adjustable-rate mortgages in the fourth quarter opted to switch into fixed-rate loans. Of borrowers who were refinancing fixed-rate loans, an astounding 99.7% opted for another fixed-rate mortgage.In January of 2006, 41.9% of all mortgages originated were of the adjustable-rate variety. At least for now, consumers appear to be wising up to the dangers of ARMs. That's probably partly a result of the headlines about ARMs destroying people's lives, with low-interest rates also playing a major role.
But here's my question: Are ARMs ever a good product, or do they really just serve to let naive or greedy homebuyers overextend themselves with artificially low payments for the first couple years?
The argument in favor of adjustable-rate mortgages is that they're a good option if you only plan to stay in the home a couple years. The problem with that notion is that it encourages a short-term approach to real estate. The longer history of property appreciation, however, tells us that the benefits of home-ownership are by far more sizable when you stay in a home for a long time. if you buy a home planning to move in a few years, closing costs, real estate commissions and assorted other expenses will probably leave you in the hole -- worse off than if you had simply rented.
In other words, adjustable-rate mortgages seem to be tools most valuable to speculators and those who are simply irresponsible. Do they have a place in real estate?
South Carolina real estate broker Darrell Gibbs of Gibbs Realty and Auction Co. recently argued that they don't, and argues that Washington should consider an outright ban on adjustable-rate mortgages:
It's true that today's stricter lending requirements and more conservative loan limits have largely eliminated these types of loans, especially the interest-only mortgages that are causing so much trouble. But there are still ARMs available, attracting buyers who must stretch their finances to become home owners. The problem with ARMs is that they are temporary loans by their very nature. They were initially intended to provide a way for first-time buyers to establish credit so they could convert to a fixed-rate loan at the end of three or five years. Today, however, many ARM borrowers can't find permanent financing and are trapped with higher payments or balloons that require the entire loan principal to be paid off at once. That's why ARM loans continue to have a destabilizing effect on the entire real estate market.
I commend this real estate broker for his courage in advocating an end to a product that has helped people in his line of work earn an enormous amount of money from inflated property prices, and hope that our elected officials will give serious consideration to the question of whether ARMs really have any redeeming qualities.
Reader Comments (Page 1 of 1)
2-27-2009 @ 3:00PM
nordaune said...
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3-04-2009 @ 1:30PM
j said...
31% of income ser for 5 yrs then it readjusts this bailout sounds kinda like an arm
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3-05-2009 @ 8:41PM
janni stewart said...
if they can refinance mortgage loan interest rates to lower fixed rates, why can't they refinance credit card interest rates in the same manner? the USA is a credit economy. some people need to use credit cards to keep afloat paycheck to paycheck, pay medical bills, etc. and bought goods when the credit card interest rates were manageable. credit card issuers--the banks--are just greedy, they keep upping the interest rates, which of course does not allow cardholders to get ahead of their debt.
why doesn't Obama insist on adherence to usury laws--is this because Biden is from Delaware where banks and credit card issuers can charge whatever interest rate they decide to?
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3-15-2009 @ 1:27AM
Shawn said...
How about letting the MORTGAGE MARKET decide whether ARMs (or any other type of mortgage) should continue to exist as opposed to government regulation???? If no one wants them, the supply of same will eventually CEASE TO EXIST. It is Economics 101; the law of supply and demand. Perhaps Mr. Gibbs should go back to school for (re)training in economics....
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4-16-2009 @ 2:17PM
arthur lee davis said...
THERE ARE SOME PEOPLE THAT HAVE NO KNOWLEDGE OF E [ POWERED ], TO 101 . THEY SIMPLY STARTED OUT WANTING TO EARN A PIECE OF THE AMERICAN DREAM AND GOT MORE THAN WAS BARGAINED FOR, MANY OF THOSE HARD WORKING PEOPLE ARE NOW OUT OF THEIR HOMES, AND (NO CHERRY ON TOP) ALSO OUT OF JOBS/CAREERS, DUE IN PART TO MASSIVE GREED ON THE PART OF. GUESS ? OF COURSE, THERE ARE PEOPLE SUCH AS YOURSELF, " WELL THEY SHOULD HAVE KNOW OR READ THE FINE PRINT BEFORE SIGNING ", THAT TOO IS A FLAWED DEDUCTION OF THE TRUE FACTS WHICH SURROUND THIS WHOLE MESS. AND IT IS SHAMEFUL. IF NOT BORDERING ON CRIMINAL ACTS THAT DESERVE A DAY/DAYS IN COURT/S.
4-21-2009 @ 9:29AM
Boomtown said...
I have been involved in the various parts of mortgage banking since 1984, and have some varied perspective.
ARMs originated in the late 70s, early 80s when fixed rates were high (I remember 15-16%). ARMS were a lot cheaper- sometimes 5% cheaper- and many people did well thru that pperiod with ARMS. Those ARMS had better terms than many of the subprime ARMs, which classically can NEVER go below their initial rate. So, during periods of extreme rates they make sense to some borrowers who understand the fine print. Also, many jumbo borrowers do ok with ARMs due to the savings there, assuming they understand the product.
That all being said, I have never actually written an ARM. With rates of 5 or 6% it makes little sense. And most people just cannot deal with a changing payment even in a fair product. I tell them a house is an investment in lifestyle, not a liquid asset. Get a pmt you can live with. Children come, jobs change, life comes at ya.. and you need as many constants as possible.
Ban? no. regulate (lol more...) yes. discourage? yes
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4-21-2009 @ 10:43AM
Roxanne said...
Don"t blame the ARMs ... blame it on the people who were not educated enough to fully understand what they were getting into and, did not know how to use the ARM to their advantage. (I guess most of them do not read the fine print)
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5-13-2009 @ 9:34PM
Sharon said...
Simple Arm loans were NOT the problem. In 2005, 2006, and 2007, BANKS originated the mess we are in by mass offering(allowing) the most TOXIC of all mortgage loans. The OPTION ARM loan. These loans (unlike earlier ARM loans) were named for the title which indicates a borrower can chose a payment OPTION. Most borrowers chose the INTEREST ONLY payment for the 3, 5 or 7 year OPTION ARM. Subprime is long since bottomed, but these loans ( ALT A, PRIME and JUMBO) are coming into their own resets now and through 2012. (Possibly longer depending on when the last of them were done). How many foreclosures do you think you will see between now and then? The amounts will DWARF the subprime bubble. This is a HUGE problem to come as by the time the reset hits, the better cedit borrowers are already in a negative equity position, meaning that their $750,000 jumbo prime OPTION ARM mortgage is now worth approx. $500,000 or less so they are in a $250,000 equity loss position already. Their mortgage will reset to a full payment amount of over several thousand dollars more a month. Before Wachovia went under, they were still offering this mortgage in early 2008. Would you keep your home under those conditions? Neither will hundreds of thousands of borrowers. We are not even close to a housing bottom nor a bail out as the money put in doesn't match what will be needed.
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5-13-2009 @ 11:30PM
Katy said...
ARMS used to be used strictly as a short term tool. Commercial construction used them alot. They were considered not appropriate for home loans, once upon a time...
To the writer of the article...it was the greedy, greedy mortgage brokers and banking world that shoved these ARMS along...what lies, what greed.
I agree though that buyers were naive...however... the banks and mortgage brokers did NOT help with education-purposely. Now everyone is in this thing.
The ARMS will always exist...but hopefully used the right way.
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