Why the Comeback of Adjustable-Rate Mortgages Shouldn't Be a Cause for Concern

If the memory of the 2008 housing crash is still fresh in your mind, you might also remember the widespread popularity of adjustable-rate mortgages (ARMs) during that time. Interestingly, after a period of virtual nonexistence, there's a resurgence in the use of ARMs among homebuyers. Let's delve into the reasons behind this trend and explore why there's no need for alarm.

Why ARMs Have Gained Popularity More Recently

Utilizing information sourced from the Mortgage Bankers Association (MBA), this chart illustrates the rising proportion of adjustable-rate mortgages over the recent years:

According to the depicted graph, following a period of around 3% representation among all mortgages in 2021, a significant surge occurred in the utilization of adjustable-rate mortgages by homeowners in the subsequent year. This increase can be attributed to a straightforward reason: the previous year witnessed a notable upswing in mortgage rates. Faced with elevated borrowing expenses, certain homeowners opted for this loan type due to its comparatively lower rate compared to the higher traditional borrowing costs.

Why Today’s ARMs Aren’t Like the Ones in 2008

Bringing clarity to the situation, it's essential to recognize that the present-day ARMs differ significantly from the ones that gained popularity prior to 2008. A significant factor contributing to the housing crash was the lax lending criteria at the time. During that period, individuals obtaining ARMs weren't subjected to stringent verification of their employment, assets, income, and similar factors by banks and lenders. In essence, loans were extended to individuals who shouldn't have qualified for them. This led numerous homeowners into difficulties as they struggled to repay loans they hadn't undergone proper qualification for initially.

In the current scenario, lending criteria have undergone a transformation. Banks and lenders have drawn valuable lessons from the previous crash and now exercise a more rigorous approach, thoroughly confirming factors such as income, assets, and employment. Consequently, individuals seeking loans today are required to genuinely meet eligibility criteria and provide evidence of their capability to successfully repay the loans they acquire.

Providing insight into the contrast between the past and present, Economist Archana Pradhan from CoreLogic elucidates:

"Approximately 60% of Adjustable-Rate Mortgages (ARMs) that were initiated in 2007 were based on low- or no-documentation loans. In a similar vein, back in 2005, 29% of ARM borrowers had credit scores below 640. In contrast, the present scenario involves nearly all conventional loans, encompassing both ARMs and Fixed-Rate Mortgages, demanding comprehensive documentation, being amortized, and being extended to borrowers with credit scores exceeding 640."

To simplify, Laurie Goodman from the Urban Institute underscores this idea with the following statement:

“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.”

Bottom Line

If concerns arise regarding the resemblance of today's adjustable-rate mortgages to those of the housing crash, be assured that there are distinct differences this time around.

If you're a first-time homebuyer and you're interested in understanding lending choices that can assist you in navigating today's affordability obstacles, consider getting in touch with a reliable lender.