If you think about the time when the housing market had a big problem in 2008, you might remember that a lot of people were using something called adjustable-rate mortgages (ARMs) for their homes. Well, guess what? After not being used much for a while, more and more folks are starting to use ARMs again when they buy a house. Let’s talk about why this is happening and why it’s not something to worry about.
Why ARMs Have Gained Popularity More Recently
This chart uses information from the Mortgage Bankers Association (MBA) to display how the share of adjustable-rate mortgages has gone up in recent years:
As the chart shows, in 2021, about 3% of all mortgages were adjustable-rate mortgages. However, last year, many more homeowners started using adjustable-rate mortgages. There’s a straightforward reason for this increase. Last year, mortgage interest rates went up significantly. Since traditional mortgages became more expensive, some homeowners chose to get adjustable-rate mortgages because they offered lower interest rates.
Why Today’s ARMs Aren’t Like the Ones in 2008
To understand the situation better, it’s essential to know that these new adjustable-rate mortgages (ARMs) aren’t the same as the ones that became popular before the housing crisis in 2008. One of the big problems back then was that lenders were not very strict about who they gave these loans to. When someone got an ARM, the banks and lenders didn’t ask for proof of their job, money they owned, income, and so on. Basically, people were getting loans even when they shouldn’t have.
This caused a lot of trouble for homeowners because they couldn’t pay back the loans they never really had to qualify for.This time, things are different. Lending standards have changed. Banks and lenders have learned from what happened in 2008, and now they check things like income, assets, and employment. This means that today’s buyers have to meet certain requirements and show that they can actually pay back the loans they get.
Archana Pradhan, who works as an economist at CoreLogic, points out the difference between the past and now. She says, “Back in 2007, about 60% of Adjustable-Rate Mortgages (ARMs) were given without much proof of income or documentation. Likewise, in 2005, almost 29% of ARM borrowers had low credit scores, below 640. But nowadays, nearly all regular loans, including both ARMs and Fixed-Rate Mortgages, require thorough documentation, follow a planned repayment schedule, and are given to borrowers with credit scores above 640.”
In simpler terms, Laurie Goodman at Urban Institute emphasizes this idea by saying, “The Adjustable-Rate Mortgages available today aren’t any riskier than other types of mortgages, and their lower monthly payments could help more potential buyers become homeowners.”
Bottom Line
If you’re concerned that today’s adjustable-rate mortgages are similar to those that caused the housing crash, you can be reassured that things have changed this time around.
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Thu, 07 Sep 2023 00:29:59 +0000
by Mottek Group