ARMs helped sink the economy - now they're back!

[WannaliveinGreenville]

Originally Posted by mortimer

I'd like another slight modification.

"Banks issuing people reckless ARMS killed the economy"
It doesn't matter how reckless the people are,
if a lender didn't issue the loan, there would have been no default.

I used an ARM in 2002 to lower my rate back then from 7.65% to 4.9%.
I took all the interest savings and used it to pay extra principle.

The idea was that no matter how much it re-set, I could refinance
later with a mortgage that would be about $10k less than otherwise.

Of course, in 2011 anyone paying more than 5.5% can't refinance their house no matter what.
The lenders have other things to do beside worrying about stuff like that.

You are absolutely correct : If banks would have said " Are you crazy ? We are not giving interest only loans ( one friend did this loan ) And we are not giving ARMS because it LOOKS like you can't really afford this home OR to pay us back " End of nightmare.

[mortimer]

Originally Posted by user_id

Yes, and this contention isn't accurate. Low down-payments
didn't cause people to purchase more house than they could handle,

So you are saying that someone who had the discipline to come to the
table with 20% of the value of the asset would then be dumb enough
to turn around and buy a place that was more expensive than they
could afford? That's never going to happen.

I can't imagine why someone would want to use a pay option ARM or
any other kind of exotic mortgage after coming up with 20%, but if
they had a good reason, the 20% down person would simply not be
dumb enough to buy too much house.

If there was a requirement for 20% down, there would probably be
absolutely positively no demand for fancy loan types - end of problem.

In the end, it still wasn't the people taking them out, it was the entities
issuing the loans that were the problem. There have always been those
dumb enough to want to buy a $500k house on a $50k income, but the
phenomenon of entities dumb enough to issue those notes is recent.

[user_id]

Originally Posted by mortimer

So you are saying that someone who had the discipline to come to the
table with 20% of the value of the asset would then be dumb enough
to turn around and buy a place that was more expensive than they
could afford? That's never going to happen.

Really? Because....it did happen many many times during the housing bubble. ALT-A loans required large down-payments, typically more than 20%, and many of these loans went into default. In fact, this is in part what killed Washington Mutual. Too many ALT-A loans in California.

Originally Posted by mortimer

I can't imagine why someone would want to use a pay option ARM or
any other kind of exotic mortgage after coming up with 20%...

Then you're not trying very hard. ARMs of any variety allow one to reduce the carry costs on a short-term investment. If you're planning to sale the home in a few years this could magnify the returns on your investment.

You don't seem to realize what people did during the housing bubble. Coming up with a 20% down-payment wasn't problematic, you could just HELOC one of your current properties.

[Willy702]

I have an ARM on one of my properties which I entered in 2004. Man its killing me to pay 2.75%

[mathjak107]

until it adusts to 7%. ha ha ha... no matter what they are still best for most folks. we throw away so many extra dollars by taking a fixed and then moving in 5 to 7 years. ever wonder why a 30 year mortgage tracks closely to a 7-10 year treasury and not the 30 year as it should? yep ,we move every 5 to 7 years with very few who dont and they end up refinancing usually along the way..

we pay extra for the priveledge of locking in for 30 years and then dont use it,great deal for the banks but sucks for you.

its like all those who buy whole life insurance and pay 10-15x the premium so they can be covered for life and then take the paultry cash value instead after paying heavyly for that old age insurance and never using it,.

[MaseMan]

Yeah, I've been hearing ARMs being advertised on the radio again. The selling point is, "If you're only going to be in your house for about 5 years, an ARM is a great deal..."

The problem is that life plans can change quickly. I suppose for some people, the inherent risk in an ARM is not bad, but I wouldn't take one personally.

[hindsight2020]

My whole thing with the short term products is that for my generation (Gen Y) if in effect the historical trend is for people to unload properties/lose jobs/move every 5-7 years, then honestly, renting is an even better vehicle than financing. Transaction costs eat up the gains on 5-7 years of flat appreciation. The days of double your money in 10 years are gone for Gen Y, renting is really the compatible approach to the "in a house for 7 years". If you want to pay for the priviledge of having that home, go ahead, but it's a premium just like any other discretional purchase or utility, it could be done cheaper.

[mortimer]

Originally Posted by MaseMan

the inherent risk in an ARM is not bad,
but I wouldn't take one personally.

If a person is looking to buy a property based on the fact that they can't afford
the 30-year fixed, but they can afford the 5-year ARM, then that is taking a risk.

A person who can easily afford the 30-year fixed, but elects to
take the 5-year ARM and uses most of the savings to either make
good investments or pay extra on the principle - - - not so risky.

[mortimer]

Originally Posted by user_id

Really? Because....it did happen many
many times during the housing bubble.

Just what is "many many times?" Even if it happened 10,000 times,
that isn't statistically significant and is just anecdotal evidence
inside a population of millions of loans.

Originally Posted by user_id

ALT-A loans required large down-payments, typically more
than 20%, ... in part what killed Washington Mutual.

ALT-A loans were all or mostly ARMs then?

Originally Posted by user_id

Then you're not trying very hard.
ARMs ... magnify the returns on your investment.

I'm sure you saw this happen, don't get me wrong.

What I'm saying is that if someone can come up with 20% from a
HELOC off of another property, then why wouldn't the speculator
just buy two properties - paying 10% on each or even 5% on four.

See? I can imagine all sorts of risky stuff.

Originally Posted by user_id

You don't seem to realize what people did during the housing bubble.

I'm fully aware of what happened.

The problem was with lending to people without verifying that they could
actually pay the note. The structure of the note wasn't the problem.

That is my only claim. I'm never said that strange stuff never happened.

I took a temp job in CA in 2006 and practically everyone I worked
with 'had a property' in either Los Vegas or Phoenix, sometimes both.
All those people could probably afford the payments, but after they
all got laid off when the plant shut down ...

In order for me to believe you, you would have to come up with some
actual statistics showing that most or the great majority of "20% buyers"
were speculating. "Lots and lots" doesn't count.

Until then, I'm going to assume that most people coming to the borrowing
table with 20% down were not speculators. They were giving out 0% down,
no interest, or worse negative-amortizing, loans. Why would speculators
try that hard? Again, I don't mean some speculators, I mean most. No way.

Finally, no bank had to make those loans. They did it to make a killing
before the scheme collapsed ( which they knew would happen ).
The behavior of the risky buyers and the structure of the notes
would have been irrelevant had the lenders done due dilligence.