A kind of mortgage that helped cause the 2008 housing crash is surging in popularity. Here’s why it’s different this time.
According to the Mortgage Bankers Association, adjustable-rate mortgages are now reaching the highest level since 2008 and are expected to continue to rise. Despite their role in the 2008 housing crash, adjustable-rate mortgages are skyrocketing in popularity. Their re-emergence should not worry you, though lending standards have tightened since the housing crash. Experts say the mortgage industry is in a safer space for both borrowers and lenders.
ARMS, adjustable-rate mortgages, are home loans with an interest rate that adjusts over time depending on the fluctuation of market rates. They’re less predictable than fixed mortgages because they tend to change periodically. They are generally considered ‘risky’ because borrowers run the chance of paying much higher mortgage payments than they may have budgeted for. On the other hand though, the borrower could pay lower mortgage rates as well depending on the mortgage market, which is why ARM mortgages are appealing.
Roughly 35% of all mortgages were adjustable rates during the mid-2000s housing boom. During the Covid-19 housing market, ARMs regained momentum as the Federal Reserve’s rate raises put pressure on mortgage rates. Applications for ARMs are predicted to continue to rise. Buyers are utilizing ARMs to combat higher rates. Although the 2008 crash led many ARMs borrowers into foreclosure, this will not happen again. Our lending standards are different now which means that today’s borrowers aren’t walking through a financial battleground like those before. There have been many improvements in the real estate industry in areas such as underwriting, technology, and quality control. The Dodd-Frank Act was created as a direct response to the financial crisis of 2008. It addresses issues in banking and lending that contributed to the economic turmoil.
Overall, the mortgage industry has evolved into a healthier space for both borrowers and lenders which means that ARMs mortgages should not cause you distress. Speak with your mortgage lender about your options to have peace of mind.
One source: https://www.businessinsider.com/adjustable-rate-mortgages-helped-trigger-housing-crash-not-this-time-2022-5
