Homeowners still up in ARMS

Houses on bar graph

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Scott Jagow: Time to continue our series, "Housing Madness." This morning, we look at the bane of the subprime mess: the adjustable rate mortgage. Believe it or not, despite what's happened, the number of new ARMS is on the rise. Low "teaser" rates still make it easy for people to get trapped in a loan they really can't afford. Even the mortgage industry might not've learned its lesson. Bob Moon has more.


Bob Moon: The tight-fisted banker everybody loves to hate in the classic movie "It's A Wonderful Life" might have been just what the financial world needed in recent years:

POTTER: I happen to know the bank turned down this loan, but he comes here and we're building him a house . . . why?

BAILEY: Well, I handled that, Mr. Potter. I can personally vouch for his character.

POTTER: Friend of yours?

BAILEY: Yes, sir.

POTTER: Uh huh. You see, if you shoot pool with some employee here, you can come and borrow money.

Nowadays, many borrowers find themselves wishing that their own obliging "George Baileys" would have spared them the favor of an adjustable rate mortgage.

Bankrate.com's Greg McBride says those loans became -- and remain -- a deceptively easy way to make the deal look affordable.

Greg McBride: "Too many mortgage products initially geared for a narrow niche of the borrowing population became mainstream mortgage products during the height of the housing boom. That masked a lot of bad loans, where borrowers got a loan for a house that they truly could not afford.

Although millions of borrowers are now in mortgage misery with adjustables shooting higher, not everyone's been scared away. Quicken Loans reports the share of adjustables is back up to 25 percent of the mortgages it's writing.

But after millions of foreclosure nightmares, why would anyone risk an adjustable mortgage?

Dick Lepre: They're right when they're right. If the savings over the period of time merits the risk, then it makes sense.

That's Dick Lepre of Residential Pacific Mortgage in San Francisco. He says you can save money -- if you're sure you'll be moving before your rates reset. Take a $400,000 mortgage that locks in a lower rate the first five-years:

Lepre: If somebody kept that loan for five years, one thing that's sure is they would have spent $13,000 less than with the fixed rate mortgage. So then the question for the individual is, is it worth the risk?

Maybe -- if the market's recovered enough that you're able sell at a profit by then. If not, though, you might end up stacking the deck against yourself.

Bankrate's Greg McBride says the lower the Federal Reserve pushes interest rates, the higher the odds they'll be heading back up at just the wrong time.

McBride: In an environment where interest rates are more likely to rise than fall, adjustable rate mortgages by and large are not a good deal.

Just ask millions of hurting homeowners. And remember, as old Mr. Potter might point out, that you're the one who'll be paying the bill.

In Los Angeles, I'm Bob Moon for Marketplace.

About the author

Bob Moon is Marketplace’s senior business correspondent, based in Los Angeles.

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