Are borrowers more financially savvy now than before the Millennium Boom?
- Yes (61%, 44 Votes)
- No (39%, 28 Votes)
Total Voters: 72
Homeowners are trading in their adjustable rate mortgages (ARMs) for fixed rate mortgages (FRMs).
Of all the home loans refinanced by Freddie Mac in Q2 2012:
- 30% were for shorter than the original loan term;
- 95% were refinanced into FRMs; and
- 81% of hybrid ARMs were refinanced as FRMs.
Of the home loan refinances completed through the Home Affordable Refinance Program (HARP 2.0):
- 95% of ARMs were refinanced as FRMs; and
- 25% of refinanced loans were for shorter than the original loan term.
first tuesday insight
Homebuyers during the Millennium Boom bit off more than they could chew by taking out ARMs with initially low teaser rates. Intoxicated by easy financing and the scent of cheap cash, buyers foolishly acted on the fallacious advice that the property securing their loan would inevitably appreciate, allowing them to either flip the home for a profit or refinance into an FRM before the rate could increase. Now, five years after the bust, those who have a choice in the matter (read: positive equity homeowners or underwater homeowners current on their monthly payments and qualifying for HARP 2.0) are choosing what has always been the wisest home finance option: FRMs.
The switch from ARMs to FRMs indicates homeowners are sobering up and the housing market is steadying alongside more conservative lending practices. Homeowners transitioning to reduced-term FRMs have the financial wherewithal to stay in their homes and make consistent mortgage payments, sometimes even greater than their pre-refinance payment. The ratio of FRMs-to-ARMs is also a measure of stable pricing since ARMs are typically originated when property prices are out of homebuyers’ reach, causing them to overextend themselves.
Recent revelation of the Libor scandal has proven the greater reliability of FRMs vs. ARMs for home financing. ARMs are indexed to Libor, whose rate has now proved to be corrupt and a contributing factor to the housing bubble. In contrast to ARMs and the compromised Libor rate, FRMs are indexed to the world’s gold standard benchmark: the U.S. Treasury note. Considering a borrower’s patently unpredictable financial future, the complexity of the economy and the corruption of the Libor, ARMs have been thoroughly booby-trapped for homebuyers and now everyone knows it.
Kudos to the majority of refinancing homeowners who have wised-up since originating their purchase loans. For the 5% who jumped from one ARM to another: the inevitable can only be delayed so long.
Re: “Freddie Mac: 95% of Refinanced Borrowers Opted for Fixed-Rate Loans” from DSNews