Adjustable-rate mortgages (ARMs) were popular when the housing crash occurred in 2008. After a long period of being virtually nonexistent, they are gaining popularity at this hour, causing much concern. Let’s clarify what the real deal is, in order to gain a calmer perspective.
This graph uses data from the Mortgage Bankers Association (MBA) to show how the percentage of adjustable-rate mortgages has increased over the past few years:
As the graph conveys, after hovering around 3% of all mortgages in 2021, many more homeowners turned to adjustable-rate mortgages again last year, with this following simple explanation.
Last year is when mortgage rates climbed dramatically. With higher borrowing costs, some homeowners decided to take out this type of loan because traditional borrowing costs were high, and an ARM gave them a lower rate.
To put things into perspective, let’s remember these aren’t like the ARMs that became popular leading up to 2008. Part of what caused the housing crash was loose lending standards, i.e., when a buyer got an ARM, banks and lenders didn’t require proof of their employment, assets, income, etc.
At that time, people were essentially getting loans that they should not have been awarded. This set many homeowners up for trouble, understandably, because they couldn’t pay back the loans that they never had to qualify for, in the first place.
This time around, lending standards are very different. Banks and lenders learned from the crash, and now they verify income, assets, employment, and more. This means today’s buyers actually have to qualify for their loans, and show they’ll be able to repay them.
Archana Pradhan, Economist at CoreLogic, reminds that in addition to the type of low- or no-documentation loans cited above, in 2007, many borrowers had credit scores below 640. “Currently, almost all conventional loans, including both ARMs and Fixed-Rate Mortgages, require full documentation, are amortized, and are made to borrowers with credit scores above 640.”
Laurie Goodman at Urban Institute concurs:
“Today’s Adjustable-Rate Mortgages are no riskier than other mortgage products and their lower monthly payments could increase access to homeownership for more potential buyers.”
Those shopping for home loans right now, can rest assured, that things are different this time.
Graph courtesy of Keeping Current Matters