On Monday, Freddie Mac reported that 97% of prime borrowers who refinanced adjustable-rate mortgages in the fourth quarter opted to switch into fixed-rate loans. Of borrowers who were refinancing fixed-rate loans, an astounding 99.7% opted for another fixed-rate mortgage.
In January of 2006, 41.9% of all mortgages originated were of the adjustable-rate variety. At least for now, consumers appear to be wising up to the dangers of ARMs. That's probably partly a result of the headlines about ARMs destroying people's lives, with low-interest rates also playing a major role.
But here's my question: Are ARMs ever a good product, or do they really just serve to let naive or greedy homebuyers overextend themselves with artificially low payments for the first couple years?
The argument in favor of adjustable-rate mortgages is that they're a good option if you only plan to stay in the home a couple years. The problem with that notion is that it encourages a short-term approach to real estate. The longer history of property appreciation, however, tells us that the benefits of home-ownership are by far more sizable when you stay in a home for a long time. if you buy a home planning to move in a few years, closing costs, real estate commissions and assorted other expenses will probably leave you in the hole -- worse off than if you had simply rented.
In other words, adjustable-rate mortgages seem to be tools most valuable to speculators and those who are simply irresponsible. Do they have a place in real estate?
South Carolina real estate broker Darrell Gibbs of Gibbs Realty and Auction Co. recently argued that they don't, and argues that Washington should consider an outright ban on adjustable-rate mortgages:
It's true that today's stricter lending requirements and more conservative loan limits have largely eliminated these types of loans, especially the interest-only mortgages that are causing so much trouble. But there are still ARMs available, attracting buyers who must stretch their finances to become home owners. The problem with ARMs is that they are temporary loans by their very nature. They were initially intended to provide a way for first-time buyers to establish credit so they could convert to a fixed-rate loan at the end of three or five years. Today, however, many ARM borrowers can't find permanent financing and are trapped with higher payments or balloons that require the entire loan principal to be paid off at once. That's why ARM loans continue to have a destabilizing effect on the entire real estate market.
I commend this real estate broker for his courage in advocating an end to a product that has helped people in his line of work earn an enormous amount of money from inflated property prices, and hope that our elected officials will give serious consideration to the question of whether ARMs really have any redeeming qualities.
Isn't it time to just ban ARM loans outright?