Too Many ARMs: In a September, 2006 economics and housing outlook report Fannie Mae reported that about 50-60% of all existing mortgages were adjustable rate mortgages ("ARMs"). In the first three quarter of 2008 ARM applications ran at about 11-14%. In the fourth quarter of 2008 they ran at about 3%. Fannie predicts that ARMs will account for only about 5% of originations in 2009 (December 2008 economics and housing report). [That presumes ARM rates will not get significantly lower than 30-year fixed rates for most of the year.] The September, 2006 report also said about 13% of all existing mortgages were subprime, and of those about 90% are ARMs, so almsot 10% of all mortgages were subprime ARMs at that time.
What About Those Subprime ARMs?: They were the original sin that started the housing and credit crisis. Amazingly, not a single bill has been introduced into Congress to directly regulate the terms of these dangerous usurious products. As an essential part of the All Streets Bailout Plan we've proposed specific federal legislation to uniformly modify all exisitng subprime ARMs and to ensure that future ARMs are fair to consumers and not dangerous to lenders (see details in our blog). The issue of future subprime ARMs is somewhat moot at present, since there are virtually no subprime ARMs on the market now.
They've been around since the early 1990's. Until recently they were a small part of the mortgage market, not more than 1% until the early 2000's when thier rates got so low that many new homeowners qualified for the first time and used them in droves. Even well-heeled investors used them to quickly close on properties they intended to flip or rehab and flip. Most had initial two year fixed rates (some say "teaser" rate), but some had three year fixed rates. (Lately, some of the very few subprime ARM lenders have switched to five-year initial fixed rates.) After the fixed rate period the rate adjusts to equal the index rate plus the margin for the loan, also known as the "fully indexed rate." The first adjustment is often limited to 3%, but for some loans it is 6%. Most subprime ARMs use the 6-month LIBOR rate for the index, which was as low as 0.8% in 2004, then rose rather rapidly to over 5% in 2006. As of 1/2/09 the index has plummetted to 1.75%, so fully-indexed rates are probably below 8% for most remaining ARMs. The margin for any ARM loan varies according to the particular loan and borrower. Most subprime lenders use margins equalling the starting note rate for the loan minus 1%, but some use the start rate. A few used margins as low as 3% (First Franklin, owned by National City). In 2003-2005 most subprime ARMs had start rates of 4.5% to 6.5%. At that time fully indexed rates were not much higher than the start rates. Then the index went way up and the fully indexed rates reached 9-13%. Those with initial adjustment caps of 3% have first adjusted rates of 7.5-9.5%. Every subsequent six months the rate jumps another 1%, until either the fully indexed rate is applied, or until the 6% life adjustment cap is reached. In many cases the rate adjusted to 10.5-12.5% during 2006 and 2007. Since about late 2007 rates have been dropping, but downward adjustments are limited to 1% every six months, so those who had high adjusted rates in 2006 and 2007 have only had 1% to 3% reductions in their rates so far.
About 1.7 million subprime ARMs were due to have their first rate adjusment in 2008. Since the index rate has fallen quickly since early 2008, many of those loans won't adjust to more than 8%, which is a big improvement over the first-adjusted rates of 2006 and 2007. Here's an interesting chart prepared by Credit Suisse and published by the International Monetary Fund that we found on the website TheTruthAboutMortgage.com (ARM reset schedule chart).
A Plague of Lenders Descends on You: You go to a site like Lending Tree to get competing quotes for a mortgage scenario. You receive three or four quotes as expected. Probably one or more of the lenders pulled your credit. Soon thereafter you start getting a seemingly endless string of phone calls and e-mails from scores of other brokers and lenders trying to get a foot through your door. What happened?
First, if only one lender pulled your credit they obtained a standard "tri-merge" mortgage credit report from their credit reporting source, consisting of a credit score from each of the three main credit scoring bureaus, TransUnion, Equifax and Experian, plus your complete credit history showing everything ever reported to any of the three bureaus (nothing older than seven years, if they are reporting correctly). Then each of the three main scoring bureaus began selling what are known as "trigger leads" to lenders and brokers who subscribe to a mortgage trigger lead program (yes, sold without your permission!). Those hopeful lenders look up your contact information and start soliciting. Luckily, if you're registered on the National do-Not-Call List, they probably "scrubbed" their leads so you didn't get a phone call, but you might have gotten an e-mail or junk mail piece.
You can't avoid the trigger lead problem. The minute one lender pulls your credit, the game is afoot, so it pays to delay having a lender pull it until you're pretty sure you want to work with that lender. You should try to get your own three-bureau credit report so you can report your scores to the potential lenders you shop (however, be aware that scores given to consumers for general purposes are not exactly the same as the mortgage credit scores the bureaus give to lenders!!). There is now one site, Zillow.com, that lets you put in your loan scenario anonymously. You can either report a general credit qualification level, or actually enter your qualifying middle credit score. Lenders then make quotes that can be viewed online. Nobody gets your contact information unless you e-mail them with it.
Second, some of the internet services that gather inquiries don't limit the number of lenders who can purchase your lead information, or they limit the number only for a period of time, so it's pot luck how many lenders got the lead.
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