ARM Crisis - How'd We Get Into This Mess?

"It's all fun and games until someone loses an eye." That's what our mothers used to say when we played rough as children. In this case it's all fun and games until someone loses a house. In the last two or three years the U.S. housing market has experienced a considerable amount of disappointment (some may say crisis). It all started with soaring house prices in Michigan, California, Nevada, Florida and Arizona. Eager investors, professional and amateur, wanted to ride the wave anticipating the prices to continue soaring. Mortgage lenders eager to get in on the business began offering option ARMs that allowed practically anyone to buy a house they couldn't afford. These Adjustable Rate Mortgages came tied with agreements that allowed the interest rates to climb as much as 6% by the first adjustment period!

The unsuspecting homebuyer (or eager fool) was faced with a house payment that just about doubled in the wake of rising interest rates. Instead of a manageable 5 or 6% many homebuyers were faced with 10% on homes that were out of their price range to begin with! The, now astronomical, interest rates forced buyers out of the market and, in turn, dropped house prices. So not only can homebuyers not afford their mortgage they can't afford to sell either because their home isn't even worth what they initially paid for it.

Next comes foreclosure. Mortgage lenders began pulling these overpriced money traps out from under people and became stuck with them themselves. Consequently, investor confidence in mortgage backed securities declined and interest rates continued to climb as a result. In addition (if that wasn't problem enough) mortgage lenders could no longer raise funds to lend and couldn't collect payment on outstanding loans. This caused 177 top lenders to shut their doors since February.

To add to all this the subprime market pretty much shut down leaving low income and hurt credit buyers out in the cold. Simple economics shows that when demand decreases supply increases. Thus, the housing market is now flooded with houses that can't sell and the lending market can't open its doors to would be buyers.

As a lesson, homebuyers need to be educated on mortgage products before they decide to buy a home. Knowing what options are out there and selecting the right one is critical. Websites like Mortgage Super Search.com provide a wealth of information and mortgage calculators that allow prospective homebuyers to do adequate research before they are ready to sign on the dotted line.