My gloom and doom about ARM is because of one big problem in the lending guidelines: borrowers are qualified based on the intial teaser rate, or at the most what the payment is at the current non-ARM teaser rate. The financial institutions *should* qualify borrowers based on the average of today’s LIBOR rate and the maximum lifetime cap of the loan, to make sure the borrower can afford the payments if the LIBOR or Fed funds rate goes up.
Borrowers are too ignorant to consider that the LIBOR or Fed rate could ever exceed 3% or 4%, or whatever it was at signing.
None remember 18% home loan rates in the 80’s. It may never get that high again, but even 8% rates would almost double your payment from that 4% teaser rate. DaCounselor, do you really think that interest rates will not go back up to the historical average of 7-8%? What will happen to the ARM mortgage payment when rates go from 4-8%? Can the borrower refinance and qualify with less equity and a double payment? No way.
So the only way the ARM person can make their payment in 5 years is if mortgage rates are back down to the lowest rate in history plus they have not lost equity due to home price declines, OR they got a 50% pay raise and qualify for the higher payments. But without the equity, could they get the loan?
DaCounselor, I am not a loan officer, so if you could check into this and bring back some opposing facts, I am happy to corrected.
Until then, what I write is the info I got from a realtor, my loan officer friend, and the website housingbubblecasualty.com, run by a mortgage broker who exposed the exotic loans and the problems they would bring. That guy left the mortgage industry this spring and doesn’t post much anymore.
I would like to ammend my statement to say, “I believe that the buyers will be forced into foreclosure in 5 years, unless interest rates are back to 5% AND they can qualify for that $780K loan for a house which will at that time probably be valued at $480K. So in all likelihood, they will be forced into foreclosure”. Does this satisfy you?
