SELLING ARMS IN THE 1990s
There was an event in 1995 that gave a wonderfully powerful jolt to my book of business.
A sales rep from a lender called LaSalle came by our office and told us about the Adjustable Rate Mortgages (ARMs) his firm offered.
They were 5 and 7 year ARMs in the 6% range, and they were a full 2% lower than the prevailing 30-year fixed rates at the time.
Borrowers jumped for those ARMs because the significantly lower rates resulted in much lower monthly payments.
I continued to sell ARMs of all types all through the 1990s and early 2000s.
But now, our borrowers rarely take ARMs.
WHY NOBODY TAKES ARMS NOW
Many people mistakenly believe that borrowers avoid ARMs because they prefer the safety of 30-year fixed-rate loans – after seeing what happened to ARM holders after the 2008 meltdown.
(Note: It’s a myth that those ARMs adjusted upward, creating affordability issues; people walked from their mortgage obligations because they were upside down and didn’t want to make payments against an upside down asset).
But, the real reason borrowers don’t take ARMs is because the “yield curve” has been so flat since the meltdown.
Normally, longer term debt is associated with higher rates because longer terms are associated with higher risks, e.g. 30-year mortgages should have higher rates than 5/1 ARMs.
This is what the Yield Curve normally entails – increasingly higher returns associated with increasingly longer maturities.
BUT, since the meltdown, shorter term maturities have had yields very similar to longer term yields.
INVERTED YIELD CURVE – RECESSION SIGNAL
Lately, the press has been in a panic about an “inverted yield curve.” This means that shorter term maturities actually have higher yields or interest rates than longer term maturities.
This happens when investors consider near-term economic prospects riskier than longer term economic prospects.
This is why inverted yield curves often signal a coming recession.
5/1 ARM RATES HIGHER THAN 30-YEAR FIXED
While our jumbo ARMs (for very strong borrowers) continue to be better than our jumbo 30-year fixed loans, our “conforming” 5/1 ARM rates are actually higher than our 30-year rates today.
Needless to say, most borrowers would be very foolish to take an ARM today.
AM I WORRIED ABOUT A RECESSION?
I am not worried for the reasons I have outlined many times: 1. Rates will fall farther if there is a recession, spurring more refinances and purchases too because lower rates make housing more affordable; 2. We don’t have the inventory glut we had in 2008 – not even close in fact; and 3. As I repeat all too often, mortgage loans are much harder to qualify for so we won’t see borrowers walking away from their obligations en masse like we saw after 2008; that influx of foreclosures created a snowball effect on values in general that greatly exacerbated the housing crisis.
Founder/Broker | JVM Lending
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