Is ARM Financing Back???
We all remember the liquidity crunch in the capital markets that first appeared in August of 2007. The impact to our financial system set in motion dramatic changes that rippled through that of the US as well as all major globally interconnected economies.
In retrospect the ironic thing is that the equity (stock) markets actually traded up throughout the end of the 2007. If I had any musical talent I suppose my feelings that month would have lead me to pen a song with a similar sentiment to Don McLean’s “American Pie.” Unfortunately I have no discernable musical talents beyond being able to download songs from iTunes to my MP3 player. What I did do was sell my fancy car, reduce my cable TV package and brace for the economic storm that eventually followed late in the 1st Quarter of 2008.
Toxic mortgages were blamed and ARMs were unilaterally lumped into this category. Pricing reflected that as no investor wanted to touch a mortgage backed security (MBS) composed of them. The flight to “Quality” priced ARMs out of the market and underwriting guidelines for these products made them very difficult to have approved.
There is no doubt with the FED’s MBS (mortgage backed security) purchase program set to expire at month’s-end that there is upward pressure on rates. This program has pumped $1.25 trillion into the MBS market and helped artificially lower long term rates. However, despite the slow down of new unemployment claims little job creation exists and short-term rates will likely remain low.
The Local Effect…
DC is a unique metropolitan and transient area insulated somewhat by many well paying Federal jobs. We have a lot of Veterans who are VA eligible moving to and fro for discrete periods of time and do not need a long term mortgage and can benefit from a VA ARM. Non-Veterans are not excluded as government backed FHA ARMs are priced quite well and provide adjustment protections.
Adding up savings on a 5yr ARM at approximately 1% lower in rate over that of a 30yr Fixed Rate Mortgage can be quite substantial and this spread is likely to expand. If you know you are only going to be in a home for a discrete period of time perhaps it is best to evaluate both scenarios. Both FHA and VA ARMs are capped at only increasing 1% per year after expiration so if a sixth or seventh year is needed on the home financing you still will be ahead because of the savings earned during the first five years.
Written By Thad Musser At First Savings Mortgage
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