“You just needed a pulse to qualify”
(Logan Mohtashami, Lead Analyst at Housing Wire, on the lending standards for ARM loans before the 2008 GFC, CBNC)
Over the past 15 years, there have been significant changes, and although the criteria for adjustable-rate mortgages (ARMs) are now more stringent, there is a growing demand for it. This seems to be an effort to manage the soaring interest rates and hope to secure favorable rates in the future.
Unfortunately, this isn’t a viable solution for the majority of the 26 million people who have been priced out of homeownership during 2022. It's impractical to expect this problem to be resolved without any innovation in the housing industry. That's why Contigo Capital is dedicated to creating harmony between both sides of the mortgage equation. We ensure that the burden of homeownership risk is no longer disproportionately borne by the homeowner, who is often the more vulnerable side of the equation.
While it's true that interest rates make it difficult for people to afford traditional fixed-rate mortgages, adjustable-rate mortgages (ARMs) come with their own risks and drawbacks. ARMs typically have lower initial interest rates that adjust over time, and so borrowers could end up paying significantly more in interest if rates continue to rise. True, March is still a question mark, but the months that will follow can take the rates even higher. This could lead to financial hardship and even foreclosure if ARM borrowers are unable to keep up with their payments.
Rather than relying on ARMs as a temporary fix, it's important to address the root causes of the affordability crisis in the housing market. This involves creating new mortgage products that are more flexible and accessible to a wider range of borrowers, as well as addressing systemic issues such as income inequality and the high cost of housing. It's also important to ensure that lending standards are rigorous enough to protect borrowers from predatory lending practices.
Ultimately, it will take innovation and collaboration across the housing industry to create a more sustainable and equitable mortgage market that works for everyone. While ARMs may be a short-term solution for some borrowers, they are not the answer to the larger problems facing the housing market today.