Adjustable Rate Mortgages

Adjustable Rate Mortgages and The Financial Crises

English Composition

Kenneth C. Robinson

American Intercontinental University

Summary

Independent published an article in the Winter issue of 2009 titled “What has Caused The Mortgage Meltdown.” In the article Stan J. Liebowitz states “The main driver of foreclosures was adjustable-rate mortgages, both prime and subprime.” He goes on to describe the financial decisions made by the government, lenders, investors and borrowers that led to the fall of the housing market. This article was written to dispel the myth that defaulted sub-prime mortgages were the cause of the mortgage crises. Research has shown that prime and subprime mortgages were foreclosed upon at equal rates.

Response

The fall of the housing market three years ago was the result of adjustable rate mortgages also known as ARMs. Many of these loans were able to get financed without any income verification. As a result people would often lie about their income to make it easier to get into the home they wanted. Low down payments were normal with these types of mortgage loans. The loans started with a lower initial interest rate, but would then rise after the initial two or three-year period expired. People in both prime and subprime markets took these loans. Most people clearly assumed that people with bad credit are the cause of the mortgage meltdown, when the truth is that people with both good and bad credit equally took out these loans. These loans were supposed to help homeowners save money. Generally most people had no problems paying the loans. It wasn’t until the interest rates on their mortgage loans reset, did the unsuspecting homeowners realize what they were encountered with. These payments would raise as much as three hundred dollars a month in some cases. This forced the homeowners to default on their mortgages. If one person does this, a home may get foreclosed. On the other hand, when millions of people all default on their...