Adjustable rate mortgages and the mortgage crisis

Abstract

Purpose

The purpose of this paper is to closely examine adjustable rate mortgages (ARM) made in Northwest Louisiana in order to provide a greater understanding of the causes of the high rate of defaults and potential foreclosures currently being experienced in Louisiana.

Design/methodology/approach

The paper examines detailed information for all ARM recorded in a three‐month‐period.

Findings

The paper finds that at least half of the loans have highly unfavorable terms with about a third having initial rates that are at least 3 percent higher than prime mortgage rates; these initial rates are likely to increase dramatically during future adjustment periods. Many borrowers also face high interest penalties if they pay back their loans before the first adjustment period. Also notable is the fact that only 7 percent result in foreclosure. While many borrowers receive unfavorable loans, relatively few loans are held for more than six years; a probable explanation is that the borrowers realize they have agreed to less than desirable terms and subsequently decide to refinance or sell the property. The results suggest that stronger underwriting standards are an important part of developing a stable lending/housing market in the future.

Originality/value

The results may be applicable to other areas across the USA and internationally, perhaps resulting in more realistic lending standards and a decrease in future defaults, foreclosures, and turmoil in the financial markets.

Citation

Bible, D.S. and Joiner, G. (2009), "Adjustable rate mortgages and the mortgage crisis", Property Management, Vol. 27 No. 3, pp. 152-162. https://doi.org/10.1108/02637470910964642