Cause Determination of the Adjustable-Rate Mortgage Market Collapse During the Financial Crisis

This paper provides insight into what caused the decline of the adjustable-rate mortgage (ARM) market during the 2007–2009 financial crisis. Contrary to common perception, the failure of the ARM market cannot be primarily attributed to predatory lending targeting subprime borrowers from low-credit households. This popular narrative is incomplete and disregards some important factors. I present three key factors that challenge the narrative and point to previously undiscussed sources that may have contributed to the ARM market collapse. First, the accusation of predatory lending does not account for other possible causes of mass ARM defaults. Second, the sole focus on the market’s subprime segment disregards the impact of prime ARMs on the market. Third, the narrative’s citation of subprime ARMs having greater delinquency rates and foreclosure numbers fails to recognize the significant percentage increase in prime ARM failures in the years leading up to the crisis, as well the disparity in typical outstanding balances between subprime and prime ARMs.