Sunday, April 03, 2005

"Fully Variable"

I regularly bash adjustable rate mortgages (and by extension the people who get them) on this site. Usually a few people jump in and say that they have an ARM, but it isn't an issue because they locked in rates for X years so it's not a big deal. And, fair enough -- just because the ARM trend, blessed by Uncle Alan Greenspan, is scary overall does not mean that every person who gets one is an idiot. But, then reading this rather creepy LA Times article on the housing market I came across this paragraph which scared the shit out of me (along with lots of other paragraphs):

The number of buyers falling into this category in any given month is unclear. But a California home builder recently got a sense when he sought to answer this question: How many of the potential buyers of his houses could still afford them if interest rates went up even a little?

To find out, the builder conducted a little experiment.

His firm's preferred lender had pre-qualified 90 potential buyers for a group of new houses. Since the houses wouldn't be ready for another six months, the builder tightened the loan criteria. He didn't want buyers to sign up for a house and then get frightened into canceling by rising rates.

He raised the threshold from a fully variable loan, the easiest to get since it immediately moves upward when rates increase, to a mortgage that was fixed for the first three years. That would shield buyers from rate jumps for at least a little while, but it's also more expensive.

Under the higher threshold, only about 15 of the buyers still qualified.

Are substantial numbers of people really getting ARMs with no rate lock-in at all? At a time when rates are virtually guaranteed to go up? scary.