Dispelling Fear: Embracing the Return of Adjustable-Rate Mortgages
The memory of the 2008 housing crash may evoke recollections of the prevalence of adjustable-rate mortgages (ARMs) at that time. While ARMs virtually vanished for a period, they have made a resurgence in the home buying landscape. Let's delve into the reasons behind this resurgence and explain why it's not a cause for concern.
Understanding the Resurgence of ARMs
Utilizing data from the Mortgage Bankers Association (MBA), the following graph illustrates the growth in the percentage of adjustable-rate mortgages over recent years:
As depicted in the graph, the prevalence of adjustable-rate mortgages surged last year after hovering around 3% of all mortgages in 2021. This increase can be attributed to a straightforward factor. The spike in mortgage rates last year led many homeowners to opt for adjustable-rate mortgages. These ARMs provided a more favorable interest rate as compared to the elevated traditional borrowing costs.
Distinguishing Today's ARMs from Those of 2008
It's crucial to differentiate between the ARMs that gained prominence prior to 2008 and the current scenario. The housing crash was partially a result of lenient lending standards. During that era, individuals obtaining ARMs weren't required to provide evidence of employment, assets, or income. Essentially, loans were extended without proper qualifications. Consequently, many homeowners struggled to repay loans they were never truly eligible for.
In contrast, lending standards have evolved this time around. Banks and lenders have learned from the past, now mandating verification of income, employment, assets, and more. This signifies that today's homebuyers must genuinely qualify for their loans and demonstrate their capacity for repayment.
Archana Pradhan, an Economist at CoreLogic, highlights the contrast between then and now:
"Approximately 60% of Adjustable-Rate Mortgages (ARM) originated in 2007 lacked proper documentation... Likewise, in 2005, 29% of ARM borrowers had credit scores below 640... Currently, nearly all conventional loans, encompassing both ARMs and Fixed-Rate Mortgages, demand comprehensive documentation, amortization, and are extended to borrowers with credit scores exceeding 640."
In simpler terms, Laurie Goodman at Urban Institute reinforces this concept by stating:
"Contemporary Adjustable-Rate Mortgages are no more risky than other mortgage products, and their reduced monthly payments could enhance homeownership accessibility for a broader range of potential buyers."
For those apprehensive about today's adjustable-rate mortgages echoing the 2008 crisis, rest assured that circumstances differ significantly this time.