When it comes to the mortgage and housing bust don't blame ARMs.
The proliferation of adjustable rate mortgages – and payment shock – during the boom years was not a major cause of the foreclosure crisis in this nation, Federal Reserve Bank of Boston economist Paul Willen told a Congressional panel Thursday.
Families with mortgages face many risks, he said: employment loss, illness, business failure and divorce, to name a few. "What our research has shown over and over again is compared to those risks, fluctuating mortgage payments present a small problem," Willen testified.
Fed economists reviewed 2.6 million actual foreclosures, finding that 60% of borrowers had fixed-rate mortgages. Only 12% experienced payment shock prior to defaulting.
Fed researchers found that most borrowers with ARMs saw their payments fall or stay the same as interest rates declined in 2008.
"Contrary to popular belief, payment shock played little role in the crisis and, in fact, most borrowers who lost their homes in the last five years had fixed-rate mortgages," the senior economist said. "This fact alone should dispel the belief that a fixed-rate mortgage is inherently safe."
Willen stressed that negative equity is the main factor behind foreclosures. He said mortgagors mostly default because of negative equity or other reasons including job loss, a major illness or some other life changing event.
The senior economist noted that payment-option ARMs have performed much better "than we expected back in 2007."
