I was working for a Boston based mortgage company somewhere around the early 80's, I believe, when we came out with one of the first, if not the first, discounted ARM's. It was a 1 year ARM at 10.125% with a 2% annual cap, but no lifetime cap. What do you think about that, there was no limit to where this rate could go. The average fixed rate at that time was 14%. Yes, we had sales at those rates, and this program was very popular.
The next big change to this program, as you might have guessed, was the addition of lifetime caps. These caps were usually 5% or 6%. Another change was that we did not qualify the buyer at the starting rate. The buyer was initially qualified at either the fully indexed rate (index plus margin at that time)or the rate at the first change date. Aside from the fact that the buyer was a better qualified buyer they were made aware of where the rate might go by this exercise. Most of these ARM's at that time were tied to the T-Bills, a fairly volatile index.
After that we started getting a little creative by adding a conversion option. This option would allow you to pay a fee, usually $250, and convert to the market fixed rate, or the market rate with a quarter to half of a percent premium. In most cases the conversion option had to be exercised between the 1 year anniversary and the end of the fifth year.
Back then we thought these programs were pretty flashy, I mean creative. We were really moving forward. However, sometimes change is good and sometimes...... I often wonder if we haven't gone a little to far and if we really need all the options we have today. Or maybe that should be the options we had yesterday.
THINK ABOUT IT THOUGH.
Fully indexed rates.
Rates at the change date.
Might a return to using these guidelines be a good idea?
Would we have fewer defaults if these rules had been in place?
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