Housing Bubble 2.0: ARMs & Reverse Mortgages are Back

ARMS comebackThe housing recovery may have already peaked but some hallmarks of the boom era are making a comeback: Adjustable-rate mortgages and reverse mortgages

  • In the fourth quarter, 31% of mortgages between $417,000 and $1 million were adjustable vs. fixed-rate, up from 22% a year earlier and the highest percentage since the third-quarter of 2008.  For mortgages above $1 million, 61% were adjustable, up from 56% a year earlier.
  • In 2013, $15.3 billion in reverse mortgages loans were issued – via a government-backed program that allows seniors to borrow against the equity in their homes – up 20% vs. 2012, Reuters reports.

Both trends have raised alarms that the “bubble” mentality of the early 2000s is making a comeback, most notably the revival of adjustable-rate mortgages (ARMs). “The tactics are reminiscent of the period before the 2008 crisis, when ARMs exploded in popularity as banks and mortgage brokers touted their low initial rates to consumers,”said a recent Wall Street Journal report. “The loans were fingered as a cause for many foreclosures.”

“We’re seeing the return of things that used to be mainstays in the mortgage financing business; they went away because they got abused,” said Rick Newman, a Yahoo Finance blogger. “Banks are not giving loans to people who don’t qualify anymore.”

While risky for both the banks and buyers, there are economic reasons for homeowners to take out adjustable-rate loans. Rates are much-lower than fixed-rate loans – and most homeowners don’t stay in their home for 30 years. ARMs can be particularly appealing to Americans approaching retirement age or anyone planning to sell their homes within a relatively short period of time.

Overall, the pendulum swinging away from “restrictive” credit and back toward normalcy is a positive. The risk, of course, is the pendulum swings too far toward “easy” credit and buyers feel compelled to take ARMs as home-price appreciation and higher rates have made homes far less affordable today vs. a year ago.

There’s a similar story in the revival of reverse mortgages: Given that 60% of Baby Boomers have less than $100,000 in retirement assets, the idea of letting retirees tap their homes for income makes sense, certainly for the individual homeowners. But there are 10,000 Americans turning 65 every day and U.S. taxpayers are ultimately on the hook for these loans, which typically are structured with balloon payments upon maturity.

In sum, it’s a good thing the revival of ARMs and reverse mortgages are raising alarm bells before they become a problem vs. after.

Source:  Yahoo! Finance