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RISMEDIA, March 2009-(MCT)-There was a day when the adjustable-rate mortgage (ARM) was a savior, often the only way to homeownership even for people with good jobs and good credit.

That day is long gone. Evidence all around us indicates that ARMs and their various manifestations, prime and subprime, were misused and abused by both lenders and borrowers.

Savior to villain in just three decades.

It was in the late 1970s and early ’80s, when 30-year fixed rates zoomed to 18 percent-plus, that the ARM stepped up as the major alternative to traditional mortgages.

When my wife and I looked at a $150,000 trinity in 1981, with our 20 percent down payment, the monthly principal and interest payment would have been $705.83 if fixed 30-year rates had been 5.10 percent, as they are today.

But at 18 percent, it would have been $1,929.51 a month. ARMs were available for 15 percent then. (We opted for a house that was half the price, with an assumable 13.5 percent VA mortgage).

As fixed rates stayed high, ARMs grew more popular. The fixed rate was still averaging about 11 percent in 1987, and it really didn’t drop with any consistency until 1993, one of the lending industry’s best years, with more than $1 trillion worth of mortgages- most refinancings.

Over the years, ARMs proved most useful as short-term alternatives. If fixed rates were 8 percent and you could get a one-year adjustable with a teaser rate of 4.96 percent, you did- especially if they were based on indexes that adjusted (including margin) to only 6 percent the next year.

The best of these ARMs had conversion clauses after 18 to 24 months, which meant that, with 20 percent equity and by paying $200 or so to the lender, you could convert into the current fixed rate within a certain window. In theory, these ARMs afforded you lower mortgage payments for a couple of years. Then you might be able to refinance into a fixed rate lower than what was available when you bought the house. But they haven’t had adjustables with such conversion clauses for a while, it seems.

The safest use of the prime ARM was by people who planned to move in a few years. (Subprime ARMs seemed to flirt with disaster from the start).

Hybrid ARMs were designed for these folks, especially the 5/1, which kept the low (and below the 30-year fixed) introductory rate for five years, then adjusted.

But in the last few years, the adjustable-rate mortgage has degraded in ways that resulted in people who had no other chance at homeownership getting just a couple of years in a place of their own, then falling into foreclosure. By December, the ARM share of loan applications had fallen to 3 percent, the lowest recorded by Freddie Mac in 25 years.

“With low consumer interest in ARMs, fewer lenders offered a wide array of ARM products,” said Freddie Mac chief economist Frank Nothaft. “The traditional, annually adjusting conforming ARM was found at one in five lenders this year, also the lowest share recorded in the quarter-century of the survey.”

Alan J. Heavens is the real estate columnist for The Philadelphia Inquirer. He can be reached at 215-854-2472 or

© 2009, The Philadelphia Inquirer.
Distributed by McClatchy-Tribune Information Services.