The End of Adjustable Rate Mortgages???

So far the rumors are only whispers floating around various forums and between professionals trying to substantiate, trying to make sense out of this nonsensical lending environment we now find ourselves in.

The whispers are about the fate of agency products, namely Adjustable Rate Mortgages potentially becoming a product of the past. Before I continue let me digress. So we are all on the same page "agency" refers to the secondary market and Fannie Mae and Freddie Mac. These two entities write the guidelines that all lenders must follow if they plan on selling funded notes to them in secondary. If a lender does not follow the guidelines, the funded note is considered unsaleable in secondary because it does not meet the agency guidelines. Currently I would estimate 80% of loans originated if not more fall into this agency bucket.

Moving forward, if Fanne and Freddie decide to cut their ARM programs, essentially the agency product line would become 30 and 15 year fixed home loans. This dramatic reduction in product line, would have a incredible effect on lending and the real estate market in general.

Point in fact ARM interest rates are lower than fixed products which means many people that could otherwise qualify for buying a home will find themselves unable to secure financing for large enough loan amounts. Those people currently in ARMs that could finance into another ARM thereby lengthing the fixed term, will now be forced to refinance into a 30 or 15 year fixed which is fine and dandy unless they do not qualify for the higher interest rate associated with that 30 year product. If they don't qualify they'll be stuck holding onto an adjusting mortgage.

The point is, this action will produce a significant ripple in our market that most people are not anticipating or planning for.

Behind the scenes if this is in fact being discussed and is not pure conjecture, they are looking at the bottom line which stems from the preformance of these financing vehicles. Point in fact it is adjustable rate mortgages that are compromising the preformance of Fannie and Freddie's portfolio right now. Since investors are always trying to trim the fat so to speak to produce the largest return on investment possible, it seems logical for Fannie and Freddie to terminate this product line, which will eventually result in clearing their books of the underperforming notes. Eventually, as time passes and these ARM notes clear their books with fixed rate notes taking their place, they will have a stronger and more secure portfolio moving forward.

Considering what has happened to Fannie and Freddie over the last couple years, I can understand why they probably have a couple higher ups locked in a sound proof room somewhere discussing all possible avenues. With that said, I hope they are not this shortsighted, and keep the ARM programs available.

If we are honest with ourselves, it isn't the program that is dangerous, it's the borrower. To make an analogy, we don't sell guns to minors, we don't even sell BB guns, or air soft guns (plastic BBs), or paintball guns for that matter to minors; if you are a minor you get Nerf. Well adjustable rate mortgage financing is similar to a BB gun... I agree it should not be sold to minors, but they should still be available for sale. ARM financing guidelines and qualifying for the program should simply become stricter and a detailed explanation of how ARMs work should be provided and must be signed by the borrower aknowledging receipt and understanding. Assuming they meet the new guidelines, and have taken the training (our explanation of ARMs) at this point in time, they should be able to secure an ARM program, end of story.

To remove a product from the market because some people got in trouble is a mistake. It is as large of a mistake as writing the guidelines too loose so everyone and their brother will qualify for it. Instead of removing the product from the market, the guidelines curtailing its distribution must be revised so people moving forward will be in a strong position to pay these loans back. Why? Because the guidelines that they had to meet to get into the program are stricter, therefore they are a stronger borrower to begin with, are more likely to make the payments, etc...

The point is, losing agency ARM products would truly be unfortunate. It would put an unforseen burden on the housing market, significantly reduce financing options for borrowers, and would have untold effects on portfolio performance. All things considered, I really hope this is only a rumor, and does not come to pass.