ARM’s Losing their Luster

by Alex Stenback on November 30, 2005

Ball_2Remember this spring, when the media was awash with articles and commentary all predicting real estate armageddon driven by the popularity of ARM’s (adjustable rate mortgages,) pay-option ARM’s and other "exotic and risky" mortgages?

Remember that? Well, as the Wall Street Journal reports, a funny thing happened on the way to our doom: The appetite among the public for these loans waned.

The declining popularity of option ARMs comes as short-term interest rates have risen and some lenders have raised prices on these loans for new borrowers. As a result, fixed-rate mortgages are regaining popularity and some borrowers are becoming disenchanted with their option ARMs…At Washington Mutual Inc., option ARMs accounted for 29% of mortgage volume in the third quarter, down from as much as 40% a year earlier. IndyMac Bancorp says option ARMs fell to 31% of its loan volume in the third quarter from 39% the previous quarter

It would be easy to take this as evidence that the bubble-fearing consumer has recently gotten more risk averse, but we don’t think this is the case.  The fact is, rates for all types of ARM’s have gone up, and they are simply less appealing, by comparison, than fixed rate loans. 
A Trendy Mortgage Falls From Favor [WSJ]
*NOTE: For those not familiar, after the jump (click the link below) is a very good graphic from the article that describes Option ARM’s. We’re putting it there to archive it for the future, but its worth a look.

Option_arm_wsj

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