The Ratchet Mortgage
At CreditSlips.org, Tara Twomey tells us about one-way ARMs:
You're right about this. I don't know of an ARM that doesn't only adjust up, or remain at the initial rate.
Fortunately, the FHA has an awesome ARM which goes both ways and it can only adjust once a year and has a reasonable cap rate.
FHA loans will take over much of the subprime market.
Most of the posts and the media are focused on the sub-prime, Alt-A and ARM for the poor credit buyers which are likely to default. But there are far greater numbers of prime credit borrowers who took out home equity ARM loans to 100% of their older house's peak prices in 2002 thru 2006. Some of them even took out additional equity as the prices went up. These equities fed into the economy in many ways, from a big new house to cars, tuitions, luxary goods and vacations. That is why the U.S./global economy was booming in the last 6 years. Now the red hot market's house prices start to fall, in turn the equity money machine rapidly slows down so is the economy. The impact from those sub-prime loan defaults is only limited to the lower income poor credit borrowers who are not the major spending forces of the economy. But the great numbers of the mid-class prime credit ARM loan borrowers who took out their home equity will make a major impact to the RE markets and the economy. When the 2/28 interests starts to reset in 2007 and onward, these mid-class borrowers will have to spend even less. Then there will be less income, fewer buyers, lower prices, higher mortgages, on and on. The horrible contraction cycles are in slow motion now but will feed itself and pick up speed as time goes on. We surely hope this storm will not spin into a depression, but what can Fed do? Drop prime rate will only slow down the contraction cycle, when the new debts are spent then the contraction cycle will increase speed even faster. Is anyone out there see this coming?
A person would have to be really stupid to borrow money under these terms.
It's not "stupid", it's desperate. Keeping up with the Joneses and such.
I believe you are generalizing at best. There are many reasons borrowers should take ARMs. Many people benefit from lower initial rate b/c they have no intention of living in the house past the initial fixed period. Most subprime borrowers benefit from the ARM b/c they refinance in an attempt to consolidate debt and get back on track to improve their credit. If they follow the plan given and do not run their debt back up they will see an increase in their credit rating and be able to refinance before the adjustment period begins. Further they can receive the benefit of a a better fixed rate at this time. These loans are not predatory but rather different products for different people. I do share your opionion that it is a shame that most people do not know what kind of mortgage they have but I do belive a good portion of the blame should go to the consumer. The principles behind mortgage finance is not rocket science and is actually quite simple if taken the time to understand. Consumers have been spoiled with low interest rates and massive appreciation. They have treated their houses like an ATM and have no one to blame for their reckless behavior but themselves. There is a reason that our consumers have more debt than savings and that is because they are not held responsible for their actions. Articles blaming subprime lenders for lending money to credit risked borrowers is just furthering the idea that these people should not be held responsible for their actions. There are plenty of regulations holding lenders responsible for their practices but no one holds the consumer responsible for shopping instead of paying their mortgage. Stop the propaganda. When US homeownership was up b/c of subprime lenders helping borrowers get into homes no one was complaining. Now that they dont pay their mortgage it is automatically because they have an ARM that was not presented to them correctly that they can not afford. I dont think so. Lack of responsibility and accountability in the average consumser is just as responsible as your supposed predatory loan.
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