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> His company had taken out commercial real-estate loans that carried floating interest rates and were adjusted each month. Those types of loans in 2021 offered

> His company had taken out commercial real-estate loans that carried floating interest rates and were adjusted each month. Those types of loans in 2021 offered initial rates as low as 3.5%. Everything changed when the Federal Reserve began raising rates last year, driving up monthly loan payments. Inflation contributed to higher expenses, and Applesway couldn’t raise rents fast enough to keep pace. After bills went unpaid, company properties went into foreclosure. Adjustable rate mortgages strike again. Is there ever a legitimate reason to go adjustable rate? It just seems like such a great way to scam investors or blow up your own finances because you're optimizing for a low payment today instead of a consistent payment over the duration of the loan. "Only when the tide goes out do you discover who's been swimming naked." - Warren Buffett

plagiarist 3y ago
The 30-year fixed rate is, unless I am mistaken, somewhat unique to America and only for people buying property where they intend to be primary residents. Commercial property has no such federal assistance and ARM isn't unusual at all. Notice how the article describes the syndicate runners profiting even if the syndicate fails. This is just a regular pyramid scheme, but part of the pyramid foundation was a low fed rate. I cannot say I feel too bad for the investors. They're buying with the intent to evict and raise rents. It's unconscionable. And foolish to put all of one's eggs in a single basket.
- bloodyplonker22 3y ago
  That's not correct. The 30-year fixed rate is available to investor/landlords as well. It is usually a few basis points more than if you were to buy the house as the primary resident.
- ElFitz 3y ago
  We have 30 years fixed rates in Europe. And most people here would consider taking out a variable rate loan to be a stupid move. In fact, people in France are usually surprised and shocked whenever they learn of some random city nearby nearly going bankrupt because their local government thought themselves smart signing up for variable rate loans.
ethbr0 3y ago
The thing I don't get is why more people don't choose */5 (aka adjusts every 5 years) or similar ARMs, if they're going adjustable. Rates aren't that different than more aggressive adjustables (i.e. */1), and it seems a much better risk bargain.
- mlhpdx 3y ago
  There is an investment path where no loan is taken at all, but while the per-property returns are better (and the approach is sustainable) the amount that can be earned overall is a fraction of what can be reaped in a “good” leveraged scenario (temporarily, historically).
- dragonwriter 3y ago
  A /5 means if the rate does adjust upward, its stuck their for five years, while you might ger lucky and miss a transient spike altogether. If its worth locking in for 5 years at the current rates toward the end of the 5 years on a 5/1, refi to a new 5/1.
samspenc 3y ago
This was my main takeaway from the article as well. While he does sound like a terrible businessman, he might have actually been 'profitable' and made a profit for his investors had he taken out a 30-year fixed rate mortgage instead of an ARM.
jrpt 3y ago
I’ve read that flippers will use ARMs because they plan to flip it before their rate adjusts upwards. There are ARMs that guarantee not to increase payments for, say, two years. But you’re basically just taking on increased risk for a better rate and/or much less money down. The flippers who do it understand the risk, they just don’t care.
seanmcdirmid 3y ago
Not all countries offer fixed rate mortgages. I’m actually surprised they have lasted so long in the states, but ya, it doesn’t make sense if you can get a low rate locked in. However, fixed rate long term mortgages don’t make so much sense for the financial system.
- ip26 3y ago
  I’m actually surprised they have lasted so long... Watching ARM's repeatedly eat unsophisticated investors, it makes a certain sense why.
  - seanmcdirmid 3y ago
    Oh, they are great products for consumers, but not for providers. Somehow they even out the rate for 30 years…but that doesn’t really work out so someone is caught holding the bag (owning loans whose interest rates are way too low vs current rates). Countries like Canada simply don’t have them (you can get one for 25 years, but at a rate that is pretty high compared to adjustables).
    - ip26 3y ago
      The fed holds the bag, which means those same consumers, but as a group. It works out because stability is generally in everyone’s interest.
      - seanmcdirmid 3y ago
        Everyone who has a home loan’s interest. Anyone who Can’t afford to take on so much debt…they just help pay for the bill.
  - listenallyall 3y ago
    Adjustable rates obviously, occasionally, lead to spectacular blowups that make big headlines. But fixed rates "silently" steal hundreds of dollars from homeowners every month. It's a bit like avoiding auto insurance, if you total your car (typically a low-probability event) you're screwed, but in aggregate, most people pay a lot more for insurance than they receive back in claims. The ability to easily refinance usually tilts the decision towards fixed rates but banks and mortgage originators actually make a bunch of money when you do so.
hibikir 3y ago
In other countries, there's often reasons to go adjustable rate, as the discount for doing so vs the fixed rate can be pretty large at times. Ultimately, on every loan worth decades, one side is carrying the interest rate risk, and you'd expect the terms to reflect it. In the US, however, the US government have found it politically convenient to have fixed rate loans be the majority. Thus, their interventions on the mortgage market work in such a way as to make the fixed rate mortgage a better deal. So yes, in the US, adjustable rates are rarely the best of ideas if you can get a conforming loan instead. Ever see how a Jumbo loan for a really expensive house suddenly has a higher interest rate, regardless of whether it's really a safe investment on the property or not? That's probably what the fixed rates would be for everyone without government intervention. But then your average voter, who is also probably claiming a mortgage interest deduction, can think they bought their house with nobody's help. In the case of commercial real estate loans for apartment complexes, I suspect that conforming loans just can't happen, making fixed rates different from what a typical homeowner would get for their own house. As the spread between fixed and adjustable changes, the decision of what is better stops being so simple.
- sgerenser 3y ago
  Weird thing is, over the past year to 18 months, Jumbo loans have generally been LOWER in rates than conforming loans for well qualified (80% LTV or less, 720+ credit score) buyers. I know this because I bought a house towards the end of 2022, and I actually had to put less than 20% down so I could qualify for a Jumbo loan, because the rate was a full 75 basis points lower than the conforming loan (at least at my credit union, but the spread was similar at many banks/brokers I shopped).

plagiarist 3y ago

The 30-year fixed rate is, unless I am mistaken, somewhat unique to America and only for people buying property where they intend to be primary residents. Commercial property has no such federal assistance and ARM isn't unusual at all. Notice how the article describes the syndicate runners profiting even if the syndicate fails. This is just a regular pyramid scheme, but part of the pyramid foundation was a low fed rate. I cannot say I feel too bad for the investors. They're buying with the intent to evict and raise rents. It's unconscionable. And foolish to put all of one's eggs in a single basket.

bloodyplonker22 3y ago
That's not correct. The 30-year fixed rate is available to investor/landlords as well. It is usually a few basis points more than if you were to buy the house as the primary resident.
ElFitz 3y ago
We have 30 years fixed rates in Europe. And most people here would consider taking out a variable rate loan to be a stupid move. In fact, people in France are usually surprised and shocked whenever they learn of some random city nearby nearly going bankrupt because their local government thought themselves smart signing up for variable rate loans.

ethbr0 3y ago

The thing I don't get is why more people don't choose */5 (aka adjusts every 5 years) or similar ARMs, if they're going adjustable. Rates aren't that different than more aggressive adjustables (i.e. */1), and it seems a much better risk bargain.

mlhpdx 3y ago
There is an investment path where no loan is taken at all, but while the per-property returns are better (and the approach is sustainable) the amount that can be earned overall is a fraction of what can be reaped in a “good” leveraged scenario (temporarily, historically).
dragonwriter 3y ago
A /5 means if the rate does adjust upward, its stuck their for five years, while you might ger lucky and miss a transient spike altogether. If its worth locking in for 5 years at the current rates toward the end of the 5 years on a 5/1, refi to a new 5/1.

samspenc 3y ago

This was my main takeaway from the article as well. While he does sound like a terrible businessman, he might have actually been 'profitable' and made a profit for his investors had he taken out a 30-year fixed rate mortgage instead of an ARM.

jrpt 3y ago

I’ve read that flippers will use ARMs because they plan to flip it before their rate adjusts upwards. There are ARMs that guarantee not to increase payments for, say, two years. But you’re basically just taking on increased risk for a better rate and/or much less money down. The flippers who do it understand the risk, they just don’t care.

seanmcdirmid 3y ago

Not all countries offer fixed rate mortgages. I’m actually surprised they have lasted so long in the states, but ya, it doesn’t make sense if you can get a low rate locked in. However, fixed rate long term mortgages don’t make so much sense for the financial system.

ip26 3y ago
I’m actually surprised they have lasted so long... Watching ARM's repeatedly eat unsophisticated investors, it makes a certain sense why.
- seanmcdirmid 3y ago
  Oh, they are great products for consumers, but not for providers. Somehow they even out the rate for 30 years…but that doesn’t really work out so someone is caught holding the bag (owning loans whose interest rates are way too low vs current rates). Countries like Canada simply don’t have them (you can get one for 25 years, but at a rate that is pretty high compared to adjustables).
  - ip26 3y ago
    The fed holds the bag, which means those same consumers, but as a group. It works out because stability is generally in everyone’s interest.
    - seanmcdirmid 3y ago
      Everyone who has a home loan’s interest. Anyone who Can’t afford to take on so much debt…they just help pay for the bill.
- listenallyall 3y ago
  Adjustable rates obviously, occasionally, lead to spectacular blowups that make big headlines. But fixed rates "silently" steal hundreds of dollars from homeowners every month. It's a bit like avoiding auto insurance, if you total your car (typically a low-probability event) you're screwed, but in aggregate, most people pay a lot more for insurance than they receive back in claims. The ability to easily refinance usually tilts the decision towards fixed rates but banks and mortgage originators actually make a bunch of money when you do so.

hibikir 3y ago

In other countries, there's often reasons to go adjustable rate, as the discount for doing so vs the fixed rate can be pretty large at times. Ultimately, on every loan worth decades, one side is carrying the interest rate risk, and you'd expect the terms to reflect it. In the US, however, the US government have found it politically convenient to have fixed rate loans be the majority. Thus, their interventions on the mortgage market work in such a way as to make the fixed rate mortgage a better deal. So yes, in the US, adjustable rates are rarely the best of ideas if you can get a conforming loan instead. Ever see how a Jumbo loan for a really expensive house suddenly has a higher interest rate, regardless of whether it's really a safe investment on the property or not? That's probably what the fixed rates would be for everyone without government intervention. But then your average voter, who is also probably claiming a mortgage interest deduction, can think they bought their house with nobody's help. In the case of commercial real estate loans for apartment complexes, I suspect that conforming loans just can't happen, making fixed rates different from what a typical homeowner would get for their own house. As the spread between fixed and adjustable changes, the decision of what is better stops being so simple.

sgerenser 3y ago
Weird thing is, over the past year to 18 months, Jumbo loans have generally been LOWER in rates than conforming loans for well qualified (80% LTV or less, 720+ credit score) buyers. I know this because I bought a house towards the end of 2022, and I actually had to put less than 20% down so I could qualify for a Jumbo loan, because the rate was a full 75 basis points lower than the conforming loan (at least at my credit union, but the spread was similar at many banks/brokers I shopped).