Chapter 14: ARMs and other Creative Mortgages During the 5 years or so prior to the mortgage collapse of 2006-2008, the mortgage industry, in partial response to escalating housing prices, developed a number of financing instruments (3 and 5 year renewable ARMs, 80/20 loans, stated income loans, NINJA loans) that enabled home buyers to purchase a home with initial low down payment and low early years monthly payments. The 2008-2009 mortgage crises proved that strategy to be foolhardy and clearly put the US Economy at serious risk of collapse. Overly creative mortgages have proven the adage of “no free lunch”. Do you agree or disagree? Justify. Should there be limitations placed by Congress and state legislatures on the use of ARMs and other creative mortgage schemes?

ARMs and other Creative Mortgages

To effectively attract the continually increasing group of borrowers, lenders came up with imaginative financing goods that had in the past occasions been marketed to high-income borrowers acquiring flexibility with their finances. Among the most known were changes on the adaptable degree mortgage also referred to as ARM that are loans whose interest rates increases or decreases periodically (Yang & Zhang, 2014). The actual rate is strategically fixed for a time not exceeding two to three years, and the benefit associated with it is that the starter degree is lesser for ARMs than those for ancient fixed-rate mortgages. This thus means reduced monthly expenses that make homeownership extra cheap and affordable thus enabling borrowers to acquire more significant loans.

The introduction of creative mortgages has proven the adage of “no free lunch” due to the introduction of various mortgage networks that allows effective discharge of services including financial services to clients without the involvement of brokers. On the other hand, there should be limitations placed by the Congress on the use of ARMs and other creative mortgages schemes due to the unethical behaviors associated with these plans (Yang & Zhang, 2014). There are cases where current borrowers are subjected into ARMs that are expected to cost extra over the life of a loan if they had preferred the fixed-rate strategy. There are also cases where borrowers complain of not adequately understanding the loan structure and the increased payments; thus, these are some of the reasons why there should be limitations when utilizing these plans.

Reference

Yang, T. T., & Zhang, J. Y. (2014). Mortgage defaults and risk-based capital: post-global financial crisis development and implications for emerging markets. The Global Financial Crisis and Housing: A New Policy Paradigm, Cheltenham, UK: Edward Elgar, 231-261.