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This scenario concerns regulators and ratings agencies about monthly ARMs. At some point, those borrowers, uncertain about their own financial position or the product's mechanics, will find themselves in a difficult situation. Fears of lost equity lead to visions of rising delinquency, foreclosure and a negative impact on home values and economic conditions as a whole.
When ARMs make sense
The truth is that the monthly ARM is an extremely functional product that should be offered with gusto, but only to those who understand its mechanics. These borrowers should be able and prepared to react to possible changes. In addition, ARMs should be offered by true mortgage professionals who have a clear understanding of the product and a healthy concern for their clients' needs.
The truly intended borrower profile may include: professionals who anticipate a progressive income increase, which would allow them to remain ahead of possible changes; salespeople whose commission income is reasonably assured but who anticipate some low-pay months; or those who may receive an annual bonus to offset negative impacts of minimum or interest-only payments previously enjoyed. Even borrowers with a more typical income structure and the means to be prepared for potential changes can benefit from this product's flexibility.
These borrowers can take the truth about the monthly ARM because its benefits are exactly what they seek. They can still buy the home of their dreams knowing that they no longer have to worry about income inconsistency if their long-range dollars are there. They can consolidate debt and invest the monthly savings or take out cash remodel their homes. They have no concern about potential payment shock or deferred interest because they are prepared and educated.
Much of the apprehension about this product might just relate to the integrity and knowledge of the trusted adviser, the loan originator. The viability and future of this product and of our industry comes down to this simple point: Those in the mortgage industry who are in it just for today will influence the future for the rest of us. Those who leverage something intended for good simply as a tool to increase their personal earnings, regardless of the damage, will have a lingering impact on the integrity of our profession and the feasibility of this product.
Paul Smoot is senior vice president, national sales manager of residential lending with BankUnited, the largest bank headquartered in Florida with $9.3 billion in assets and 54 branches. Reach him at (305) 818-8524 or email@example.com.
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