Adjustable Rate Mortgages (ARMs) have received a lot of bad press in the current economy.  But are they really bad and are they really the cause of the “housing crisis” that we are facing? 

No.  ARMs are not bad loan products.  But they do have a time and place, a specific purpose and use.  The problems that we are seeing right now are a result of the ARM loan products being used incorrectly.  So what would be the appropriate use of an ARM loan?

The ARM loan product was designed to be a short term program to assist those who are otherwise financially challenged (bad credit mostly) to be able to get into a home and begin rebuilding their credit.  A person with bad credit could get a home loan which is the single best credit building credit line available.  Then over the course of those first 2-3 years this person could restore their credit worthiness in order to get into a standard fixed-rate mortgage at market rates.

The problems that we see today are the result of those ARM loan products being marketed to everyone regardless of ability to repay.  Many people were given ARM loans and their ability to repay was based on the introductory rate.  Once the rate adjusted these people were unable to afford their mortgages any more.  The shorter the time frame to an adjustment the shorter the time frame before default.

Should we keep ARM loan products on the market?  Absolutely.  But they should be used for their intended purpose, a time for a person to improve their credit so that they can get a good fixed rate mortgage on their home.  It may be appropriate to require home buyer education and financial literacy before an ARM loan is originated to guarantee that the borrower understands what kind of loan they are getting and to help them make appropriate plans to improve their credit within the time frame of their loan product.