Saturday, April 21, 2007

Benefits of Subprime, ARMs for Conforming

Two more comments on mortgages...there is a good side to subprime. The mortgage market is much more flexible than it was a generation ago. This opens up the possibility for people without really good credit or a down payment to buy a home. Given that home ownership is widely considered A Good Thing*, then that is a real benefit.

The next thing I am worried about is ARM adjustments. Not just for the crazy subprime PoAs with ridiculous teaser rates, but for conforming mortgages on a 5/1 or 7/1 schedule. 2-3 years ago, those were being offered at rates of 4% or even a bit less, fixed for 5-7 years, then variable according to an index. No gimmicks there, just a reflection of the historically low rates at the time. But the fully-indexed rate on those could easily be 6.5% today, and possibly more in a couple of years (or less, we really don't know). It seems to me that there have to be more than a few A-credit homeowners who will feel the sting if their rate goes from 4% to 7+% (I know there are caps, it probably takes 2 years to get there).

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