Adjustable Rate Mortgages / So What’s the Problem?

Well, that’s what the old ARM loans did. But they did not perform as well as either lenders or consumers expected for at least 3 reasons that are important. First, lenders were interested in recapturing the higher long-term rate too quickly via the periodic rate adjustments provided for in these loans, thus eliminating the usefulness of the loan structure to many consumers. Second, The ARM was not well understood by loan officers and brokers who were selling it to consumers; so, unfortunately, there was probably a lot of misinformation floating around. And third, it was possible in many ARM programs for the borrower to get “upside down,” which means that the low payments in the early years were insufficient to properly service the debt and amortize the loan, creating a situation in which the loan balance would increase each month – instead of decrease - for a period of years.

As general interest rates continued to rise in the 1980s, the problem was exacerbated by the resulting large adjustments to mortgage rates and monthly payments in ARM loans. There arose a hue and cry, not just from borrowers, but from the lending and real estate industries as well. Something had to be done. Something was.