Mortage Rates
When most recall the 2008 housing crisis, memories of adjustable-rate mortgages (ARMs) and their popularity during that era come rushing back. After a hiatus, it seems ARMs are finding their place in the modern housing market.
A recent analysis from the Mortgage Bankers Association (MBA) reveals a significant rise in the preference for ARMs in recent years. After a steady 3% usage in 2021, we saw a remarkable spike as mortgage rates escalated. The reason? With climbing rates, homeowners sought refuge in ARMs to counter the weighty traditional borrowing costs, obtaining more appealing rates.
It's essential to recognize that the ARMs of today are not replicas of their 2008 counterparts. A lax lending environment during that time was partially responsible for the housing tumble. Banks handed out ARMs without validating essentials such as employment, income, or assets. Consequently, many found themselves with loans they were ill-equipped to handle, primarily because they hadn't gone through stringent qualifications.
Fast forward to today, our lending fabric has evolved. Informed by past missteps, financial institutions now meticulously vet the income, employment status, and assets of potential borrowers. This ensures only those genuinely capable of servicing their loans receive them.
To highlight this shift, Archana Pradhan, a respected Economist at CoreLogic, mentioned:
“Back in 2007, about 60% of ARMs were given without thorough documentation, and in 2005, 29% of ARM recipients had credit scores below 640. Fast forward to the present, and almost every conventional loan, be it ARM or Fixed-Rate, mandates comprehensive documentation. Furthermore, these are usually awarded to borrowers with credit scores exceeding 640.”
Laurie Goodman of the Urban Institute further simplifies this evolution:
“The ARMs we see today aren't any riskier than their conventional counterparts. Their reduced monthly outlays could indeed pave the way for more individuals to embrace homeownership.”
In Conclusion
If the shadows of the 2008 housing debacle have clouded your perception of today's ARMs, let me reassure you - this is a new era with redesigned safeguards. The landscape has shifted, and it's a change worth embracing.
Article inspiration from keepingcurrentmatters.com
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