Adjustable Rate Mortgages Continue to Get Pummeled

Looking at the news, much has been made about the so called housing bubble & the effect that exotic mortgages are having on the general housing market. Recently, the CEO of Countrywide, one of the largest mortgage lenders in the United States, offered his estimate of the level of understanding that he feels his customers have of Adjustable Rate Mortgages (ARMs) & other non-traditional mortgage products that have risen in popularity over the past few years. He feels that these products aren't as much of a mystery as some advocacy groups believe they are. What is also interesting is that there is fear that these types of loans are disproportionately hurting less affluent borrowers.

As a former mortgage loan officer, I admit that exotic mortgages were just beginning to gain in popularity when I made my exit from the profession, so I'm not as familiar as some, however, having shopped for an ARM myself, I think it is a bit curious to suggest that the pitfalls of exotic mortgages only affect the not-so-wealthy borrower.

My wife & I initially financed the purchase of our home back in 2004 with a 90/10 loan. This loan features a 90% First Mortgage locked for 5 years & a 10% Second Mortgage that adjusts after the first year. This mortgage product was attractive to us because it prevented us from paying Private Mortgage Insurance (PMI). We eventually needed to refinance the 2nd to pay off a few things, so that's when I began inquiring about an interest only loan. It's extremely important to point out that our total debt on the home was quite modest (less than $130,000). We looked into combining both mortgages on an interest only loan with about $7,000 additionally to pay off a debt or two. Come to find out, this type of scenario did nothing for our bottomline. It didn't reduce our monthly payment, and obviously, it didn't reduce our principal loan amount. Not that I needed him to tell me, but the mortgage professional I spoke with said that the deal didn't make sense.

I bring this up because it illustrates how an interest only ARM doesn't really benefit someone borrowing a nominal amount of money, i.e. a less affluent borrower. If we had purchased a more expensive home, then the monthly payment would have looked more attractive, but my wife & I would still have had to explore all the pros & cons regarding this product before making a decision. Obviously, in our case, the exotic mortgage didn't make sense because our total debt service was relatively cheap & stable enough that it didn't warrant much change, but even if the monthly payment had been cheaper, it wouldn't have saved us much each month. Similarly, less affluent buyers are not likely to be able to afford a home where an exotic would make sense either, so I'm not quite sure how ARMs can be said to disproportionately affect less wealthy borrowers in a negative fashion. It seems to me that borrowers who are finding themselves with huge payment increases were not all poor, but instead, they did not take into consideration all of the hurdles that might emerge later.

This brings me to my next point: It is absolutely crucial to do your homework when making crucial buying decisions. Find answers from someone you trust to be straight with you so that you can avoid dangers like predatory lending or merely keeping up with the Joneses. As I stated, the mortgage professional I spoke to said the deal didn't make sense. Furthermore, he didn't try to get me to see it another way in hopes of putting more money in his pocket. Instead, he referred me to someone else in his office to handle refinancing my second mortgage.

The bottomline is there are very few one-size-fits-all products available whether you're buying a belt or a mortgage. Exotic mortgages are a solution to some, but a nightmare to others. It would be over-simplifying the issue to say that all ARMs are bad, but given the huge magnitude of borrowing money, it only makes sense to balance the information available concerning the loan with what you know about your foreseeable future. The results might not be guaranteed, but at least your decision will be an educated one.