Adjustable Rate Mortgage (ARM) Loans in Today's Economy?

Today, in my e-mail, I found a mailer from a loan officer touting ARM loans.  It was entitled "Adjustable Rate Mortgage (ARM) Loans in Today's Economy? Yes!"  I am attaching the link in order to permit the reader to have the full context: http://docuweb.docustar.com/53monthly_mailer/2011/03/retail/article1.html

I come at this as a former mortgage loan officer, having originated mortgage loans from 1983 until 2007.  I originated everything from the old CAMeL loans, NegAm loans, loans with/without caps, et al; and I've originated the old FHA 245 loans (Neg Am) Graduated Payment loans.

Sophisticaed, number-crunching business men with accounting backgrounds may have found advantages to ARM loans, and I've seen scores of loan officers punch out all sorts of statistical numbers with a HP-12c; but I seriously doubt that the average prospective homebuyer really benefits from playing the odds with an ARM.  Scenarios are generally set forth in their best light, and make too many assumptions.  This article does just that.

Permit me to make a few observations:

I.  The Loan Officer quotes data from NAR [implication is REALTORS® can believe the statistics]: "According to data collected by the National Association of Realtors, existing home sales have increased five out of the past six months, meaning while buyers are leery, they are willing to step back into the market with the right Real Estate Professional and the right mortgage. The right mortgage product could be an Adjustable Rate Mortgage." 

Response: Increased home sales does not lend credence to ARM loans, anymore than stating that policemen drive down a certain stretch of highway suggests the highway must be safe.

II.  "ARMs grant a number of up-front benefits. As with any loan product, there are risks involved, but being familiar with the cost savings inherent with an ARM, Real Estate Professionals, Brokers and Lenders can better inform and serve their customers."  [implication is professionals will often recommend ARMs]. 

Response: The number of benefits are not enumerated--only "cost savings inherent with an ARM" is offered. 

"The most obvious benefit of an ARM is how much less the initial monthly mortgage payments are. Getting a client's attention should be easy when explaining the monthly payment for an ARM as compared to a fixed-rate loan. 

Response: Compared to what?    I must stress that current fixed rate mortgages are at historic lows.  When an ARM rate adjust, where is it headed?  WHY would a bank tout an ARM (or any loan product) unless they see PROFITS AHEAD!  Rates are going up from here; and what will consumers do when their adjustable rates appear ready to increase?  You got it! REFINANCE to a fixed rate loan that is higher than current fixed rate loans.  Twent-seven years in mortgage finance is MY WITNESS. 

III.  ARMs are some of the most common types of mortgages used in many countries. [So.  AK-47 are one of the most common asault rifles]. 

Response: This is the old "EVERYBODY IS DOING IT" argument.  Most of those nations have economies that we do not wish to copy.

IV.  "An ARM generally becomes 'dangerous' when homeowners are overextended in debt. As long as their current financial situation is stable and they have no intention of financing several big-ticket items (a new car, a yacht or every new electronic gadget known to man), things should still remain relatively comfortable, even if rates increase in the future." 

Response: Yea, I bought that horse, and found him in the barn dead!  Sounds like a lot of "IF" to me...  I'm not lending my credibility to this bucket of "barn-yard" fertilizer--I know what it grows: debt.

V.  "It is important to have a conversation with potential homebuyers to explain the benefits and consequences of ARM loans in order to determine if an ARM loan is right for them." 

Response: When interest rates are double-digit, and we experience a rerun of Jimmy Carter's economics, I may have to look at ARMs; but not likey before then--especially for people purchasing their first home.  Too many horor stories in my past.

Fellow REALTOR®, the small monthly "savings" of an ARM is not worth the RISK that home buyer incurs.  Generally, they will spend more in refinance costs than they saved.  Personally, my wife's peace of mind is worth far more.

Adjustable Rate Mortgage (ARM) Loans in Today's Economy?  I vote "NO!"