Motley Fool: A Farewell to ARMs?

Motley Fool: A Farewell to ARMs?


One reason why adjustable-rate mortgage rates haven't dropped is that lenders are more risk-averse than ever. Falling home prices are already sapping liquidity from mortgage-lending institutions, requiring cash infusions at Countrywide Financial (NYSE: CFC - News) and other mortgage lenders.

In addition, lenders are understandably reluctant to offer adjustable-rate mortgages. With the threat of federal legislation freezing rates at artificially low levels, borrower financing through ARMs is an extremely risky proposition. Furthermore, because the market for mortgage-backed securities has experienced severe problems lately, lenders have to plan for the possibility that any loan they make will have to remain on their books for the long term.

In response to this additional risk, lenders are demanding higher spreads over prevailing Treasury rates. As a result, borrowers may see less benefit from lower rates than they have during similar periods of low rates in the past.

Whether the mortgage market starts to function normally again remains to be seen. For now, however, most borrowers still have every incentive to choose fixed-rate mortgages over ARMs.

Comment: Good riddance to ARMs!


  1. You know, I was going to try to parse out the "good riddance to ARMs" and try and figure out a good reason for ARMs--say when there is a down payment and each payment pays off some principal--but then I remembered that ARMs take the onus off the Fed to keep monetary policy stable.

    So well said.

  2. This may not be the best place for this, but I don't want to go back and try to find old posts where it might fit better. But, it does at least fit somewhat because it's dealing with economics.

    Anyway, apparently there is a wild rumor going around now on the Internet that the American economy will collapse by September 2008, the Federal government will subsequently implode by February 2009, and there could be a resulting civil war because of all this turmoil................If you come across this rumor, don't believe it! It's a hoax.

  3. My prediction: Many globally minded people want to regionalize the world. I don't think the dollar will actually collapse, but I think we may be in for a rough ride and there may be an illusion that the dollar will collapse. The answer to this seemingly inevitable calamity will be to switch from the dollar to the Amero (North American money similar to the Euro in the European Union). When Americans are told something to the effect that gas will cost much cheaper on the Amero, they will not only tolerate it, but beg for it.

  4. You know, anon, the "gold bugs" (I'm almost one) have been saying this for decades. We might figure a way out--gotta remember that a LOT of people even did pretty well during the Depression, including my grandparents.


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