Study - Adjustable Rate Mortgages

Give them a leg up -- but not an ARM

While Adjustable Rate Mortgages (ARMs) account for 24 percent of all home loans nationwide, they represent a much greater percentage of certain types of loans and of the mortgages made to specific communities and demographic groups. In 2005, ARMs made up three quarters of all subprime loans, a huge increase from 1999 when half of all subprime mortgages were ARMs.

In addition to conventional and higher-cost subprime mortgages, there are now additional "alternative" lending products available including interest only loans, option payments, and adjustable rate mortgages (ARMs) with low initial "teaser" rates called hybrid ARMs which adjust to higher rates after a low-initial rate during the first few years of the loan.

The majority of subprime ARMs adjust after two years. While these loans may be suitable for a homeowner who plans to live in the home a short time and anticipates appreciation of the home value, it is a dangerous loan for long-term homeowners, particularly in an economic environment with rising interest rates.

Although subprime loans are intended for people who are unable to obtain a conventional prime loan at the standard bank rate, Fannie Mae and Freddie Mac have estimated that between one third and one half of all borrowers in subprime loans could have qualified for a lower cost mortgage. Thus it follows that a large number of the borrowers who have received ARMs should not have been in the subprime market.

In far too many cases, alternative mortgages are being sold to consumers who can only afford the initial lower-payments but will not be able to afford the higher payments that will come when either the interest- only period or the initial "teaser" rate period ends.

These borrowers will be jolted into increased payments that will mean additional hundreds of dollars due in a single month's time and this amount will likely continue to increase. Borrowers will have failed to build much, if any, equity at this point meaning that they cannot afford the increase, and particularly if their home value fails to increase significantly, they will not have enough equity in their home to refinance or sell. The result is damaged consumer credit, possible loss of the home, increased defaults for lenders, and in communities with large concentrations of these loans -- more vacant houses.

2005 High Cost Loans in the Columbus Metropolitan Area
Out of all refinance loans made in the Columbus metropolitan area, nearly one in three loans, 32.1 percent, were high-cost loans. One of four home purchase loans in the metropolitan area, 26.5 percent, were high-cost loans.

A high cost loan is a mortgage ($25,000+) where total points and fees payable by the borrower exceed five percent of the total loan amount (exclusive of federal or state agency fees and one percent yield spread premiums).

In 2005, 60.1 percent, or three of five, home purchase loans received by African-Americans were high-cost loans and 36.7 percent, or more than one out of three, home purchase loans received by Latinos were high cost loans. In contrast, only 22.6 percent, or less than one out of four, home purchase loans received by whites were high-cost loans. In 2005, 50.1 percent of the loans received by low-income homebuyers were high cost loans, or about one out of two loans. 39.2 percent of the loans received by moderate-income homebuyers, and 21.7 percent loans to middle-income homeowners were high-cost loans. In comparison, only 15.4 percent of loans made to upper income homebuyers were high-cost loans.

America's lower income and minority communities receive a disproportionate number of subprime loans and thus are most at risk of increased defaults and foreclosures. With sixty percent of subprime loans set to have their interest rates change by the end of 2006, ARMs pose a huge threat to the security of individual homeowners and entire neighborhoods.

Talk with your buyers. Make sure they understand how an adjustable rate mortgage works. Help them to buy -- and keep their home.

Using public data available under the Home Mortgage Disclosure Act, the ACORN Fair Housing Corporation used a sample of 275 lenders that are owned by 15 of the largest lenders in the country. According to industry estimates, these lenders represent 65.5 percent of all residential mortgages originated in 2005 and 55 percent of the subprime market. The data for the Columbus metropolitan area includes Delaware, Fairfield, Franklin, Licking, Madison, Morrow, Pickaway and Union counties.