Out of the Frying Pan – in to the Fire: The Case of Adjustable Rate Mortgage for Funding of Homes of the Underprivileged

7 Pages Posted: 20 Oct 2015

See all articles by Muhammad Arsalan Aqeeq

Muhammad Arsalan Aqeeq

University of Newcastle (Australia); Durham University - Durham Islamic Finance Program; Institute of Business Management (IoBM) - College of Business and Management (CBM)

Date Written: October 19, 2015

Abstract

The topic of Adjustable Rate Mortgage (ARM) in its first glimpse, takes us to the reader of terms like Global Financial Crisis, Meltdown, Subprime crisis and its horrors. Global Financial Crisis (GFC) – The greatest of all financial crisis after the great depression of 1930, emancipated from a complicated interplay of policy to improve home ownership, by greater credit supply, laxed terms, overoptimistic assumption of real estate growth, predatory lending stunts instincts, and option to offload the balance sheet by securitization, poor remuneration to promote short term gain versus long-term value and last but not the least and macro-prudential governance shortfalls. The reason we discuss GFC here is that ARM were employed by Financial Institutions to finance the subprime i.e. the under-privileged. So did it work? No, it actually coasted them a USD 4.1 Trillion losses, 9 Million families displaced and thousands unemployed. Notwithstanding the fact that, a lot many other factors such as weak underwriting, monetary tightening, moral hazard across the value chain, unrealistic assumption on real estate valuation contributed to the GFC. Farhi, E., & Tirole, J. (2009) termed the GFC as Collective Moral Hazard while reviewing the role of macro prudential regulation, Interest rates, Lender and Investment Banks. This article would assess the structural dynamics of ARMs and subsequently rationalize its inability to alleviate or address the financing needs of the underprivileged.

Suggested Citation

Aqeeq, Muhammad Arsalan, Out of the Frying Pan – in to the Fire: The Case of Adjustable Rate Mortgage for Funding of Homes of the Underprivileged (October 19, 2015). Available at SSRN: https://ssrn.com/abstract=2676172 or http://dx.doi.org/10.2139/ssrn.2676172

Muhammad Arsalan Aqeeq (Contact Author)

University of Newcastle (Australia) ( email )

University Drive
Callaghan, NSW 2308
Australia

HOME PAGE: http://https://www.linkedin.com/in/arsalanaqeeq/

Durham University - Durham Islamic Finance Program ( email )

Durham, DH1 3HP
United Kingdom

Institute of Business Management (IoBM) - College of Business and Management (CBM) ( email )

Karachi
Pakistan

HOME PAGE: http://https://www.linkedin.com/in/arsalanaqeeq/

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