Financing in Fleming Island>Question Details

Lori Gunn, Real Estate Pro in Fleming Island, FL

Adjustable rate mortgages sunk our economy in the past. Now 3.5% compared to 5% fixed are we going to start seeing ARMS more in the future?

Asked by Lori Gunn, Fleming Island, FL Mon Feb 14, 2011

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You stating that ARMs caused the collapse in the economy is like saying the spoon caused Rosie O'Donnell to get fat. ARMs were and always will be misused. People are told about them and what they are good for but it falls upon deaf ears. All they see is the immediate impact on the bottom line. Then, in a few years when the rates reset, they act shocked.

Yes, we will always see ARMs in the picture. And it is up us to inform our clients as best as possible about the harm the ARMs. We are not experts (ok...maybe some) in the mortgage industry yet we cannot expect the mortgage brokers or lenders to educate them fully where they would comprehend the ramifications of their actions.
1 vote Thank Flag Link Mon Feb 14, 2011
I respectfully disagree that "adjustable rate mortgages sunk our economy." ARMs are a perfectly legitimate financing tool if used properly. But what happened?

--Borrowers who couldn't qualify for a set rate mortgage applied for and received ARMs, even though they fully knew that they'd never be able to afford the payments once the rates adjusted.

--Lenders pushed ARMs, knowing how to bundle up a lot of sub-prime loans and sell them off for big profits. (Read "The Big Short" by Michael Lewis.)

--Real estate agents were willing accessories to the process, not really caring whether the buyer could afford the property, but just caring about whether the buyer could qualify for a mortgage.

Just a side note: I bought a home with an ARM in 1985. The interest rate was 8%. The provisions of the ARM let it move up or down by up to 1 percentage point a year, within a range of +/-4%--so it could vary between 4% and 12%. Some years, it's gone up a bit. Some years it's gone down. For the past couple of years, it's been at 4%.

There's nothing wrong with ARMs. Just with people who misuse them.
1 vote Thank Flag Link Mon Feb 14, 2011
Don Tepper, Real Estate Pro in Burke, VA
I would agree with you if the statement said "Adjustable rate mortgages, with balloon payment, sunk our economy in the past"; otherwise, it worked in the opposite direction you have suggested. Whomever bought with ARMS 5-7 years ago, hold to now, reap all the benefit of dropping rate. Whomever bought with fixed rate 5-7 years ago, hold to now, stuck with the high rate, unless they have the mean to make up the different in appraisal. Going forward , it doesn't make sense to go with ARMS.
0 votes Thank Flag Link Mon Feb 14, 2011
Once Fannie and Freddy are history (in a few years) most primary residents will need a minimum of 10% for down payment. So no matter how low rates might be, fixed or adjustable it will still be much more difficult for the average person to become a home owner.

Tony Vega
Charles Rutenberg Realty
0 votes Thank Flag Link Mon Feb 14, 2011
Tell me how ARMs sunk our Economy, most people that went under never realized threat an arm could go down as well as up, you had to adk for the correction but when the Fed rate went down to near nothing, your rate should have too. The bank didn't do it with out you saying hey, why did my rates go up when fed rates did, but not down when fed rates fell, There would have been a cap on how low it would go, but you could actually have lowered your rate during the bad times, most people did not understand their loan and there were strangled by it. Don't sign what you do not understand. Don't tell me that the banks have the upper hand here, you just got to read the 15 pages of loan agreement you are given in the office at time of signing. Has anyone ever said hold on, I'll be back to sign this tomorrow, I wish to look the full terms of this loan over and decide whether or not I wish to abide by the rules you have mapped out on these 15 pages you brought to the signing and which I have never seen before. That I could not possibly sign this document until I have read and digested every line of your agreement! No you nod you head with pen already hand as so smart or slick character says that all that wording is normal for this and just says you get a loan and agree to pay it! When you default they are telling the judge to look at paragraph 35 section C line 8 and as you can see your honor our client signed and knew the rights the bank have when it comes to default!
0 votes Thank Flag Link Mon Feb 14, 2011
I disagree that rates had much, if any, affect on the economy that made it crash. Lenders giving loans to people who could not or should not have gotten them is what did it.

We have already seen one thing poking its ugly head out of the sand where it was buried for many years and that is Rent To Own aka land contracts. The number of people out there bringing up that subject has gone way up over the last 2 months. This is because the lenders have tightened up who they will loan to and they did this back in the mid 1980's - if you were doing real estate then, I was. The ARM's also came out and so I guess you will see them as rates creep up. I can remember fix rates in late 80's of 6% and ARM's at 4% with 2-6 caps. In a couple years you would be over the fixed rate, but people bought them.
0 votes Thank Flag Link Mon Feb 14, 2011
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