Homebuyers are giving risky adjustable rate loans a different look | news

Choosing ARMs over fixed-rate loans lowers a borrower’s costs for a period of time, perhaps five to 10 years, after which the interest rate can increase along with the monthly payments. The cap of some ARMs will be increased; all carry the risk that homeowners could end up paying more money if they don’t sell or refinance.

Major reforms have been implemented since the housing bust, when a swarm of homeowners unable to keep up with their mortgage payments triggered a global financial crisis. Among other things, banks and credit unions will no longer underwrite mortgages for borrowers with uncertified income and assets.

People in the industry say the pros and cons of the option can work well for sophisticated borrowers familiar with the products — but that first-time homebuyers might want to think twice.

Bakersfield-based surveyor and market watcher Gary Crabtree called ARMs a “deathblow” to the market. He blamed them for the recession more than 40 years ago when, during the Carter administration, a mortgage product that increased borrowers’ monthly payments over time allowed people to qualify for loans they took out two or more years three years later could not afford.

He expressed a general skepticism about ARMs.

“ARMs never made sense in a downtrend market,” Crabtree said. Its most recent Home Markets Report from late July showed that Bakersfield was on track for a third straight monthly decline in median home selling prices, a key benchmark.

Lenders have restructured ARM products in recent years, giving them a longer term at the initial guaranteed interest rate, William and Sheeza Gordon’s Bakersfield real estate team said via email. They found that some of the loans have helpful caps on rate hikes. But their endorsement of ARMs only went so far.

“I would only recommend them to more experienced buyers who are willing to risk their future and expect their income to remain constant or increase,” the Gordons wrote.

Chuck Smith, senior vice president and chief lending officer at Valley Strong Credit Union, said ARMs have remained a relatively constant portion of mortgage loans at the Bakersfield-based institution. In his view, the loan product has gotten a “bad reputation”.

“That wasn’t the cause,” Smith said, referring to the bust. “The cause of this was that people were put in houses they couldn’t afford.” Arms made the bust worse, he added.

The main benefit of an ARM, he said, is that it boosts a homebuyer’s ability to afford a home. Smith agreed that the arrangement isn’t necessarily best for first-time buyers, depending on their cash flow, but it does save money for people who don’t plan to stay in the home long or who are able to protect themselves from the interest of the home Loan refinance rate increases.

Bakersfield-based Safe 1 Credit Union President and CEO David King said via email that ARMs were partly to blame for the financial crisis, but they didn’t play as much of a role as some suggest.

King listed what he believes contributed to this: lack of regulation, unscrupulous appraisers, careless rating agencies, hungry lenders, and loans with bad features like interest payments.

Safe 1 doesn’t make much ARM lending, he said, because people are usually better off with traditional fixed-rate loans. They remain historically reasonable, he added, at about 5.25 percent these days for a 30-year term.

He suspects ARMs will become less attractive if interest rates continue to rise. But he warned against making financial decisions based on guesswork about where rates are going “because it’s just that, an assumption.”

“As with any other important decision,” King wrote, “research and understanding are paramount when considering a mortgage, especially an ARM.”