Affluent Black County Mired In Mortgage Mess

[AGDee]

There are ARMs that are not bad. I got an ARM 10 years ago. It was fixed for 2 years and after that, it is adjusted annually. It is a set percentage above LIBOR. It cannot change more than 2% at one time (up or down) and it cannot go higher than 5% above the original rate. It is currently at 4% and has gone down every single year since it has been adjusting. There are no "gotchas" of a balloon payment at the end of a certain time period or anything. Even if mortgage rates skyrocketed now, they would have to continue to skyrocket for 5 years before I would hit the max at this point. Yes, there is a danger that it could go up to 13% max, but it really isn't likely that we'll see the LIBOR go up that high over the next 10 years. It is a pretty safe ARM. I'd have been paying 8% for the last 10 years had I gotten a traditional mortgage and I'd be unable to re-fi at this point because the house could never appraise for high enough in this economy. Mine is a very low risk ARM and has served me well.

[DrPhil]

Originally Posted by AGDee

There are ARMs that are not bad. I got an ARM 10 years ago. It was fixed for 2 years and after that, it is adjusted annually. It is a set percentage above LIBOR. It cannot change more than 2% at one time (up or down) and it cannot go higher than 5% above the original rate. It is currently at 4% and has gone down every single year since it has been adjusting. There are no "gotchas" of a balloon payment at the end of a certain time period or anything. Even if mortgage rates skyrocketed now, they would have to continue to skyrocket for 5 years before I would hit the max at this point. Yes, there is a danger that it could go up to 13% max, but it really isn't likely that we'll see the LIBOR go up that high over the next 10 years. It is a pretty safe ARM. I'd have been paying 8% for the last 10 years had I gotten a traditional mortgage and I'd be unable to re-fi at this point because the house could never appraise for high enough in this economy. Mine is a very low risk ARM and has served me well.

Yes, some people have benefited from ARMs, particularly people who (1) don't plan on living in the home after the time that the rate will be adjusted; and (2) people who have considered what they will do when the rate increases (perhaps not 13% but they still need to consider how they will pay if the rate is higher than expected).

Since life is difficult to predict, many people (homebuyers and housing professionals) are recommending against ARMs if the only incentive is the introductory rate. That and the economic crisis fueled the housing crunch once people's dream house's introductory rate increased to the prevailing rate and people couldn't pay (partly because the average American doesn't save much money and doesn't build wealth).

Originally Posted by Boodleboy322

People are still originating the vanilla Agency ARMs and Jumbo ARMs but the underwriting guidelines are stricter. Yes there is still risk that people will default just like any committment you make when you borrow money. There is always a chance that someone won't make the payment (even for folks with higher credit scores) for whatever reason. The Credit Score and low DTIs are a gauge that tells the lender if the borrower is most likely to make their payments and prepay the mortgage.

The days of not qualifying on a 30yr Mortgage and getting tossed into an "ARM" are gone. If anyone in the banking world is still originating Hybrid Option ARMs (definition: a mortgage that would allow you to get a 1.00% interest rate for the first three months and then cast into options of either going Fully Am, Interest Only, Fixed, etc that was typically attached to the MTA or COFI index) then the risk is being retained on a balance sheet at the bank and is not going into the securities market. Those types of securities have no liquidity. Yes, prior to the Subprime meltdown if a borrower couldn't get underwritten on a 30yr Conventional they had an option to get into a Hybrid Option ARM which had looser underwriting guidelines to get into a mortgage.

Thanks for explaining. As for the bolded, some mortgage lenders are advising people against ARMs whereas other mortgage lenders present ARMs as a wonderful, fool-proof option (which is why research is important). Either way, people generally may not be tossed into an ARM but, especially when using a mortgage lender that doesn't advise against an ARM, people are choosing the ARM either immediately or after not qualifying for the 15 or 30 year fixed rate. What eventually happens to a lot of people after that introductory rate moves to the prevailing rate has been discussed in this thread.

If I had a dollar for every time I read "don't let mortgage rates/bad credit/whatever keep you from your dream home" on a mortgage lender's website in 2011. People need to buffer their excitement with research. There are home buyer and mortgage tools that help people consider the potential pros and cons of it all.

[AOII Angel]

ARMs are a risk. Not all are created equally obviously. Subprime loans got us into this mess, and luckily those have been axed. I have a 5 year arm on my B'more house. We didn't think we'd be there 5 years...we were right. It resets next year, and hopefully we will be selling it by then. If we don't, it won't be a tragedy. Even if the rates don't stay this low, we will be able to afford the difference. I will hopefully be closing on a condo in Phoenix next Monday with a 30 year fixed. I agree with Dr. Phil. I'm not messing with a 5 year arm this time. We only have to put down 5% so the equity we have in the property is not enough to refinance later down the line.

[Boodleboy322]

Originally Posted by DrPhil

Thanks for explaining. As for the bolded, some mortgage lenders are advising people against ARMs whereas other mortgage lenders present ARMs as a wonderful, fool-proof option (which is why research is important). Either way, people generally may not be tossed into an ARM but, especially when using a mortgage lender that doesn't advise against an ARM, people are choosing the ARM either immediately or after not qualifying for the 15 or 30 year fixed rate. What eventually happens to a lot of people after that introductory rate moves to the prevailing rate has been discussed in this thread.

Which lender is underwriting ARMs for customers that do not qualify on a fixed rate mortgage? That sounds like a red flag.

[DrPhil]

Originally Posted by Boodleboy322

Which lender is underwriting ARMs for customers that do not qualify on a fixed rate mortgage? That sounds like a red flag.

To clarify, for customers who do not qualify for a particular size of mortgage loan.

To answer your question, mortgage lenders who know that lower introductory rates mean lower introductory payments. Therefore, homebuyers can qualify for a larger loan to fit the dream house that people are told not to let mortgage rates/bad credit/whatever keep them from.

[Boodleboy322]

Originally Posted by DrPhil

To clarify, for customers who do not qualify for a particular size of mortgage loan.

To answer your question, mortgage lenders who know that lower introductory rates mean lower introductory payments. Therefore, homebuyers can qualify for a larger loan to fit the dream house that people are told not to let mortgage rates/bad credit/whatever keep them from.

That still doesn't provide a specific name. I'm asking for specific names of those lenders (i.e. Wells Fargo, Citi, Bank of America, XYZ Credit Union, etc).

[DrPhil]

Originally Posted by PiKA2001

Hey, I'm on vacation so I'm allowed. I also have to build up a tolerance to alcohol. I'm flying out west and touring Pinot Noir country this week!

I look forward to your thoughts on these topics.

Boodleboy322, I know this isn't your intent but this is not going to be a discussion (or debate) of what specific lenders are or are not purportedly doing. I will just generally say that homebuyers are going based on language used on different lenders' websites and conversations with the people who work for these lenders.