Pay Option ARM loans are not all evil
A payment option ARM loan is not a bad loan by itself. For an informed and educated consumer they can be great wealth building tools. They can help consumers with seasonal, or otherwise inconsistent (I’m not saying lack of, just large amounts one month and less in other months like someone in the financial sector who gets a large annual bonus, but back to that in a minute), allowing them to afford the house they truely can, not less. For a lender they are great loans, they allow the company to earn great incomes, after all most had real interest rates 7.5% and higher at a time when a vanilla loan was 1.5% or more lower. Sure helps when you can book business at a higher rate than a lower rate. They are great for mortgage brokers and lenders in that they paid really well. Sure I’ll spend some time to learn a new product that could allow me to make 2+ times the usual revenue a loan does.
But here is how all those people can turn a great loan in to a horrible loan. Consumers blinded by rate, or payment fail to ask questions about how it is possible. Consumers who have consistent income (or even inconsistent income) are blinded by greed and use the loan to buy more house than they can really afford or could pay off. Using it for the “lower” payment, not as the financial tool it is designed for. Lenders drunk on great returns started offering this loan for its profit. After all year end bonuses make the world go round in the financial world. Loan officers and companies who sold the product simply because it made them great money, not because it was the right loan for the customer. They cared more about the quick buck than the long term value of the relationship.
Shame on everyone. Pay Option ARM loans are not all evil, but in the wrong hands used for the wrong reasons they are.
