Motley Fool: A Farewell to ARMs?

Motley Fool: A Farewell to ARMs?

Excerpt:

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!