The Odious ARMpit: an adjustable rate mortgage global economic disaster
A short, factual article on how we’ve learned absolutely nothing from the housing market / mortgage foreclosure crisis that caused the Great Recession. We live in a bubble.
The nation chose originally to create Adjustable Rate Mortgages that assured financial collapse if housing values ever stopped climbing. People took out ARMs because they could not qualify on their current income or with their current debt load for a certain loan. They were betting their income would rise by the time the interest rates rose and were hedging this with the belief that their house’s value would rise, too. As a result, they were sure they could refinance at a good rate even if their income didn’t rise because of the rising equity in their home. When incomes stalled and housing values started to drop, the house of cards came down. It was all profligate living.
In spite of the enormous global crash that this kind of loan helped set up, the nation still chooses to allow ARMs. We know from disastrous experience that they are financial traps when housing values fall, but we are still allowing them in a time of falling values. I’m not sure why anyone would even want an adjustable rate mortgage at a time when fixed-rate interest is the lowest it has ever been and ever will be. Now is the time when wise people get a loans in a size they can actually afford for the longterm and lock into that fixed rate for the next thirty years … IF they’re going to buy a house.
That the nation still allows these traps only shows our leaders and our banks have learned nothing. One who thinks he’s wise might take out such a loan because he plans to sell the house before the scheduled rate increase, but that’s the devil’s bargain made in the past, as it assumes he will be able to sell the house and pay off the mortgage.
At least one credit union (The Pentagon Federal Credit Union, no less) is currently enticing its members with this wild claim: They can get an ARM of 3.125% today (a little lower than would be available in a fixed rate) with an adjustable interest rate that they claim will be only 2.75% after five years, lasting for the remaining 25 years. Of course, the small print says the actual rate change will be based on a certain index (but they don’t say anywhere on their web site what index). They say nothing about the near-zero likelihood any index for interest rates is going to be lower five years from today. So, they are baiting people with the potential that an adjustable rate will actually go lower when interest rates have never been lower than they have been in the last couple months even when they know with near certainty that the rate will actually adjust upward. Total deception.
Given that banks can get a virtually unlimited supply of almost free money from the government right now, why would interest rates drop five years from now? And this is the PENTAGON Federal Credit Union. It cannot be excused for acting like it doesn’t know that interest indices have historically not gone lower than what they are today. (I’m posting a link to their page, but note that their rates are “subject to change daily,” so the page may change daily or even disappear.)
This kind of abject greed is how banks created their own destruction last time around, yet we have bailed them out to save them from themselves just so we could save ourselves from them when faced with offers like this! To this day, no one in government has learned a thing, for no one in government is preventing the kind of salacious advertising with false interest hopes mentioned above. Yet, Republicans continue claiming the banks do not need more regulation. They need still less!
Adjustable rate mortgages are always enticing because they let you buy a better house today than what you can actually afford, but they based on a lot of blue sky in the future.