[quote=CA renter][As for those ARM mortgages, they were being pushed heavily during the bubble because of the historically low interest rates. If rates are low in the current period, they are more likely to go higher in the future. Lenders were using ARM products to shift this (rising) interest rate risk onto borrowers when rates were low. If rates are high (and lenders think rates are near the top), they will be more likely to want to lock-in those rates via fixed-rate product.
IMHO, while ARM loans will be available, in order to account for the rising rates, lenders will probably have higher starting rates, and/or raise caps on the increases over the life of the loan. They will want borrowers to qualify at the highest possible rate, because lenders will understand the risk of collateral price depreciation. This will affect what the buyers/borrowers can afford. Lenders might also increase down payment requirements for these loans to protect against the risk of depreciating collateral in a rising rate environment.
IOW, I’m not so sure that ARM products will give borrowers much more purchasing power if we begin to see rates rising rapidly.
Just a guess, but if I were a lender, that’s what I’d be doing.[/quote]
Yea, but unfortunately, the lenders are not like you. 🙂
I might be wrong, and SD R or sdr can tell, but when the rates were high for the 30 yr FRM, more people bought with ARMs – i.e. fixed rate for 5,7 yrs or 10 yrs, then adjustable rate. Many people sell within 7 years (on average), or at least used to. A 8% FRM is high, but it could go higher still (15% 30 yr FRM for example) so there is still risk of that.
I agree that, compared to the bubble time, the criteria WILL be more stringent for the ARMs, like better DTI ratio, higher down (but still no more than 20%), higher credit scores etc.
So when the rates for the 30 yr FRM will rise to 8%, a higher percentage of well qualified buyers will go for the ARMs instead, especially if they think they would either sell in 10 years, or re-fi to a lower rate in that interval. The monthly payment until then will be lower with those ARMs, so it will keep the buying power relatively the same.
