It’s still the same problem whether it’s a teaser rate or a regular ARM, it’s just a matter of scale.
Re: foreclosures, investors DO get their money back, they call it the recovery rate in the industry.
If you’re an investor, would you rather recover 70% of your money back now through foreclosure and go put it in something else, or have 100% of your money locked in for five (or more) years in a possibly cash-flow negative investment, and eventually foreclose anyway at lower recovery rates (e.g. if the real estate market continues downward)?
Remember most investors themselves borrowed money to relend to homeowners. If their interest payment goes up but your ARM doesn’t go up to match, they may wind up paying you to live in your house.
This plan will delay the day of reckoning for a small number of borrowers while making it harder for everyone to get mortgages after burning investors further.
That’s a reasonable argument...however:
The foreclosure process usually takes about 2 years once that “recovery” phase is reached. By that time many of these people may well have been able to refinance their loans.
Also - the investors never expect to make money beyond the fixed-rate period of the ARM. The idea behind doing a three-year ARM is that the loan would be refinanced and paid off at the end of the three years, which is also usually when the prepayment penalty was up. Meaning, the investor gets their money back and what they made in interest the three years prior is all they’ve made on it.
Prolonging the 3 years to 4, 6 or whatever prolongs that time they get their money back.
However, they will continue recieving monthly payments this way. With foreclosure, yeah, they’ll get 70% of it back, but it will take about 2 years with no money recieved between now and then.
Bingo!!! Either harder and/or more expensive for those that have acted responsibly.