“An 80 percent rate for adjustable mortgages was so far out of the market that it should have raised red flags for lenders,” says Raphael Bostic, associate director of the Lusk Center for Real Estate at the University of Southern California. “But because of the continuing appreciation of home prices, lenders by and large felt that they were somewhat insulated from any particular hardship.”
For consumers, those adjustable rates were very enticing. You could get a five-year jumbo adjustable-rate mortgage for 5.375 percent, compared with 5.875 percent for a jumbo 30-year fixed-rate loan. (Any loan above $417,000 is a jumbo loan.) Depending on the value of the loan, that 0.5 percentage-point difference could save hundreds of dollars per month for the borrower.