The Birth of the Adjustable Rate Mortgage

A History of the ARM

The adjustable rate mortgage has long been a staple in the American mortgage industry and it’s helped thousands of people qualify for a home that they otherwise could not afford. In recent years, these types of mortgages have tended to be labeled with negative connotations and they can be dangerous if not used with caution. Originally, adjustable rate mortgages were created to combat inflation in the 1970’s. Lenders quickly realized they were losing money on mortgages due to inflation costs and soon transferred those costs to consumers through ARMs. When inflation stuck and interest rates increased, the consumer would face rate hikes in their mortgage, ensuring lenders still earned a profit. While this caused more than a few people to lose their homes, the mortgage industry eventually refined and improved ARMs, adding rate-caps and other protections for buyers.

ARMs Take off

With the development of new adjustable rate mortgage products and less strict credit standards, the housing market began and ARM’s began to take off around 2003. Around this time, the Federal Reserve enacted policies that combated inflation, allowing banks to offer low-introductory rate ARMs by the dozen. Lured by the initial low rate, thousands of people took out adjustable rate mortgages, some completely unaware that their interest rate and house payment could dramatically increase. Some buyers were well aware their interest rates would soon go up, but planned to immediately refinance when it happened. As more people purchased homes through ARMs and loose credit guidelines, the housing market boomed, attracting investors far and wide. Home prices increased and just about everyone was making money in the housing industry cash cow. Unfortunately, the housing market boom and the success of ARMs was not destined to last.

Current Situation

Since home prices were increasing during this time, buyers with adjustable rate mortgage were typically able to refinance to a new mortgage once their rates went up. That is until about 2006, when home prices stopped increased and even began decreasing in some areas. This left many homeowners without the option to refinance, leaving them stranded in their ARM with increasing rates. Soon buyers started to fall behind on their mortgage payments and foreclosures started popping up around the country. Of course, these foreclosures caused serious damage to lenders and many were forced to cut back or declare bankruptcy. Now, most lenders won’t go anywhere near the once popular adjustable rate mortgage and credit guidelines are more stringent than ever. It’s all left the housing market in a veritable crisis, although the proposed financial bailout plan could spark some new life in it.