Mortgage & Loan: ARMs--The Final Option

Bankrate, in its usual evenhanded fashion, has a great article explaining the ins and outs of that most deadly of mortgage instruments, the option adjustable-rate mortgage (ARM). Of particular note is when the author explains exactly who ARMs are designed for and why:

Lots of people are fine candidates for option ARMs. The loans are well-suited for people whose incomes vary from month to month (think small-business owners and salespeople on commission) and people who get a big chunk of their income via bonuses (your boss's boss's boss, investment bankers and sundry corporate chieftains).

Ohlbaum says he has a client who gets half his income from an annual bonus. He pays the minimum amount most of the year, and then pays back all the negative amortization with one huge payment. "It makes perfect sense for the right guy, and he's the right guy," Ohlbaum says. And if you're like that guy, an option ARM probably won't hurt you.

In other words, ARMs are designed for high-income homebuyers, the sales/commission market (which includes realtors), and basically any sort of employment where you can expect large chunks of extra income in lump sums. NOT the average salaried worker or working family. Yet this is who ARMs have been marketed to in incredible numbers, with predictably tragic results:

Some mortgage industry experts estimate that as much as one-half trillion dollars’ worth of adjustable rate mortgage loans (ARMs) are scheduled to reset this year, the Washington Post reports....While lenders claim that borrowers understand the features of these loans, and that they are restricted to borrowers with good credit histories and solid down payments, the Washington Post says, Standard & Poor’s warned last year that disturbing numbers of minimum payment loans were given to borrowers with low credit scores...Cindy Manzettie, chief credit officer for Fifth Third Bank in Cincinnati, said in a letter to regulators last spring, that it’s not the “lender’s responsibility to help the consumer determine the appropriate payment option each month. . . . Paternalistic regulations that underestimate the intelligence of the American public do not work.”

Of course not, especially when lenders who have overestimated the American public's financial savvy can earn such a tidy profit from it.

Disgusting and criminal.

Posted at September 7, 2006 02:56 PM

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Bankrate, in its usual evenhanded fashion, has a great article explaining the ins and outs of that most deadly of mortgage instruments, the option adjustable-rate mortgage (ARM). Of particular note is when the author explains exactly who ARMs are designed for and why: Lots of people are fine candidates for option ARMs. The loans are well-suited for people whose incomes vary from month to month (think small-business owners and salespeople on commission) and people who get a big chunk of their income via bonuses (your boss's boss's boss, investment bankers and sundry corporate chieftains). Ohlbaum says he has a client who gets half his income from an annual bonus. He pays the minimum amount most of the year, and then pays back all the negative amortization with one huge payment. "It makes perfect sense for the right guy, and he's the right guy," Ohlbaum says. And if you're like that guy, an option ARM probably won't hurt you. In other words, ARMs are designed for high-income homebuyers, the sales/commission market (which includes realtors), and basically any sort of employment where you can expect large chunks of extra income in lump sums. NOT the average salaried worker or working family. Yet this is who ARMs have been marketed to in incredible numbers, with predictably tragic results: Some mortgage industry experts estimate that as much as one-half trillion dollars’ worth of adjustable rate mortgage loans (ARMs) are scheduled to reset this year, the Washington Post reports....While lenders claim that borrowers understand the features of these loans, and that they are restricted to borrowers with good credit histories and solid down payments, the Washington Post says, Standard & Poor’s warned last year that disturbing numbers of minimum payment loans were given to borrowers with low credit scores...Cindy Manzettie, chief credit officer for Fifth Third Bank in Cincinnati, said in a letter to regulators last spring, that it’s not the “lender’s responsibility to help the consumer determine the appropriate payment option each month. . . . Paternalistic regulations that underestimate the intelligence of the American public do not work.” Of course not, especially when lenders who have overestimated the American public's financial savvy can earn such a tidy profit from it. Disgusting and criminal.