ARMs Don't Kill Houses, Loan Hacks Kill Houses

By
Mortgage and Lending with San Diego VA Home Loans/858-777-9751

Adjustable rate mortgages, ARMs for short, are the most misunderstood, misused, and maligned financial instrument.  The have been abused by consumers, Realtors and loan originators alike these past 3-4 years and are now the subject of national scourge.  Much like our Second Constitutional Amendment critics, the ARM critics are usually misinformed and preying upon the fear of catastrophe. 

These inexperienced mortgage sales people or "loan hacks" as I like to call them, are banking upon your fear of catastrophe.  Loan hacks sold you ARMs in 2003 and negative amortization ARMs in 2005.  After they ride the fixed rate mortgage trend, they'll move on to reverse mortgages.  They lack original thought and critical analysis.  They'll sell you any loan that is on the front page of USA Today.

ARMs don't cause foreclosures, loan hacks cause foreclosures.

READ:   I am an American ARMs dealer.


Fixed rate mortgages, for the lion's share of the population, are an inappropriate recommendation.  Mortgage advertisers, unschooled in financial planning , are aggressively advertising fixed rate mortgages as a cure to the rising ARM rates.   They're encouraging you to sell low and buy high. 

SAY WHAT?   DID THEY FORGET THAT RATES GO DOWN, TOO?

You should lock in a fixed rate mortgage at the low end of an interest rate cycle, not the high end of it.  It is easier to sell fear than to properly counsel you so these loan hacks will try to baffle you with slick sounding "Myths".  

 

Three Myths Fixed Rate Loan Hacks Love to "Quote": 

READ THE REST ON AMERICA"S MORTGAGE BROKER
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Ambassador
1,031,539
Celeste "SALLY" Cheeseman
Century 21 Liberty Homes - Mililani, HI
(RA) AHWD CRS ePRO OAHU HAWAII REAL ESTATE
Congratulations!
Jul 30, 2007 11:28 AM #33
Rainer
70,844
Thomas Weiss
Thomas R. Weiss - West Palm Beach, FL

Brian,

Congrats to you, I think you did great, and you made it very tough competition for us, but it was fun!!

 

Tom Weiss

Jul 30, 2007 11:33 AM #34
Rainer
81,971
Rey Gallegos
W.J. Bradley Mortgage Capital LLC (NV License # 504) - Las Vegas, NV
FHA, VA, Home Loans Las Vegas, NV
Brian, Excellent post!  You really did a spectacular job!  Congratulations on the honors!  I look forward to reading more of your stuff!
Jul 30, 2007 11:40 AM #35
Rainer
8,327
Freddie Castaneda
Beechwood Realty - San Jacinto, CA
San Jacinto Valley Real Estate
Brian,  Great post.  Very informative.  i will be bookmarking this post for references.  Thank alot.
Jul 30, 2007 11:47 AM #36
Rainer
127,981
Stefan Scholl
Buyer's Broker of Northern Michigan, LLC - Petoskey, MI
Northern Michigan Real Estate
As usual, excellent advice and information.  Hopefully with the sub-prime bust, many of the loan hacks have found new jobs in other fields.
Jul 30, 2007 12:16 PM #37
Ambassador
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William Johnson
RE/MAX Associates - San Diego, CA
San Diego Real Estate Voice, GRI CRS e-Pro CDPE
Brian, This should be mandatory reading for every REALTOR, Buyer and Seller on the planet. No reason for Loan officers to read it. if they don't already know it, they have chosen to ignore it and should not be dealt with in the first place. Congratulations Brian, this is a winning post!
Jul 30, 2007 12:20 PM #38
Anonymous
Anonymous
Anonymous
I got a 7 year ARM a few years ago because it was the lowest rate available (in the 4's). We selected an ARM based on how long we thought we might remain in the house. When the time is up, we will refi or sell. At any rate (no pun intended), we've saved oodles of money over the past few years with our low, low rate. Even if we refi to a higher rate, the money we will have saved over the 7 years is still money we have saved, that benefit doesn't go away! I've had so many buyers say to me "I must have a fixed rate" when they only plan to be in the house for 4-5 years. I tell them to talk with their lender - fixed is not always better - look at the WHOLE PICTURE of your financial situation and then decide. Thanks for a great post.
Jul 30, 2007 01:35 PM #39
Rainer
33,105
SHAUN WREN
LICENSE IS NOT PLACED - Lakeland, FL
Congratulations.
Jul 30, 2007 01:41 PM #40
Rainmaker
129,326
Jim Little
Ken Meade Realty - Sun City, AZ
Your Sun City Arizona Realtor

Brian, I am now trying to sell a home for a client who got slammed by a loan hack just two years ago. 2 year interest only at 7.5, LIBOR index, after 2 years payments can increase, and did, to interest rate of 10.25, can increase each 6 months by 1% to a max of 14.5%. I guess loan hacks were at work here.

More importantly, after reading this article, I re-read the ARMs dealer post. You have a broken link regarding tempering reverse amortization. This sounds like an important concept, maybe you could adress it in a future post.

Jul 30, 2007 01:55 PM #41
Ambassador
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George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages Connecticut - Middletown, CT
Your Connecticut Mortgage Expert
Brian, congratulations on your second place finish.  With the number of very good entries this was not something easy to accomplish.
Jul 30, 2007 01:58 PM #42
Rainer
4,197
Meg Burns
Offer Angel - Phoenix, AZ
OfferAngel.com

Brian,

I share in your opinion that many loan officers play up to the fear that people have and thus through there clients into a cycle where they are refinancing from the ARM, to the Option ARM to the Fixed. One thing I have noticed has not received tons of attention and I wonder if you see this coming as well is how "trendy" it was to sell the Option ARM and now that it has such a negative image that it is now "trendy" to sell the Home Accelerator plan.  I see this mortgage and the software that come along with it as the next loan to cause mass problems. Any thoughts?

Jul 30, 2007 06:23 PM #43
Rainmaker
305,524
Brian Brady
San Diego VA Home Loans/858-777-9751 - San Diego, CA
VA Home Loans/San Diego

One thing I have noticed has not received tons of attention and I wonder if you see this coming as well is how "trendy" it was to sell the Option ARM and now that it has such a negative image that it is now "trendy" to sell the Home Accelerator plan.  I see this mortgage and the software that come along with it as the next loan to cause mass problems. Any thoughts?

I don't think accelerating debt in itself is a problem...UNLESS..you're doing it at the expense of liquidity.  The problems with accelerating the amortization:

1- It may limit the deductibility of interest on any cash out refinances you do in the future.

2- It strains liquidity.

Better to maximize home indebtedness, use an interest-only or neg am loan (when appropriate) and invest the difference in a side fund.

Cash is King...then, now, and in the future. 

Jul 30, 2007 08:10 PM #44
Rainmaker
182,152
Janet Guilbault
RPM Mortgage, Alamo Home Office - Walnut Creek, CA
San Francisco Bay Area Direct Mortgage Lender

Brian: Just wanted to stop by and say congratulations. I wrote a blog yesterday that mentioned why I think this blog should be an ActiveRain Hall of Fame post (if there is such a thing) There was never a doubt in my mind you would be one of the winners...this is one of the best I've seen.

 

 

 

Jul 30, 2007 08:52 PM #45
Rainer
3,575
Robert Kerr
Kerr Financial - Warwick, RI

ARM'S outperformed fixed rates since WWII.

No, that's not the claim.

Read it again. "Any given five year period."  Not any given period.

And not just any ARM, but the one-year ARM.

And not against fixed rates, but only against the 30-year fixed.

Does anyone actually think that this cherry-picked datum (which will no longer be true in 24-36 mos) is meaningful in some wider ARM v. fixed sense? If so, I'd like to hear the reasons why.

Jul 30, 2007 09:56 PM #46
Rainmaker
305,524
Brian Brady
San Diego VA Home Loans/858-777-9751 - San Diego, CA
VA Home Loans/San Diego

Does anyone actually think that this cherry-picked datum (which will no longer be true in 24-36 mos) is meaningful in some wider ARM v. fixed sense? If so, I'd like to hear the reasons why.

No, I think we'd like to hear the rationale for your prognostication about rates, Robert. 

Jul 30, 2007 10:03 PM #47
Ambassador
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Jeff Dowler CRS
Solutions Real Estate - Carlsbad, CA
Carlsbad CA Homes for Sale (760) 840-1360

Excellent post, Brian. You are a master at this stuff! See you in SFO!

Jeff

Jul 31, 2007 12:46 AM #48
Rainmaker
120,426
Rebecca Savitski
NC List for Less Realty Incorporated - Raleigh, NC
NC Real Estate Listings
My favorite answer when my buyers ask me my opinion of an arm is "it depends." No 2 borrowers are the same.
Jul 31, 2007 09:06 AM #49
Rainer
3,575
Robert Kerr
Kerr Financial - Warwick, RI

Does anyone actually think that this cherry-picked datum (which will no longer be true in 24-36 mos) is meaningful in some wider ARM v. fixed sense? If so, I'd like to hear the reasons why.

No, I think we'd like to hear the rationale for your prognostication about rates, Robert.
 

Hi Brian.

Mortgage Rates Decline but One Year ARM Rates Go Off the Chart 

I guess technically I was wrong; It only took 2 months, not 24.

 

Sep 10, 2007 08:08 AM #50
Rainmaker
305,524
Brian Brady
San Diego VA Home Loans/858-777-9751 - San Diego, CA
VA Home Loans/San Diego

One step ahead of you, Robert.  Written in response to that article last week

It's temporary 

Sep 10, 2007 08:50 AM #51
Rainmaker
305,524
Brian Brady
San Diego VA Home Loans/858-777-9751 - San Diego, CA
VA Home Loans/San Diego

One step ahead of you, Robert.  Written in response to that article last week

It's temporary 

Sep 10, 2007 08:51 AM #52
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Brian Brady

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