Mortgage Finance (The 1980s): ARMs, Deregulation, Monetary Policy Shift, Economic Reform, and Scandal

Mark Justin
8 min readDec 31, 2019

*This post is a part of a series of posts I have written. To start from the beginning, click [].

Introduced in the late 1970s and early 1980s, adjustable-rate mortgages (ARMs) became popular among both lenders and borrowers. At one time (according to HSH Associates) the largest publisher of mortgage and consumer loan information, ARMs comprised as much as 75% of all mortgages originated.

As long as there was an upwardly sloped yield curve, the short-term interest rates or indices used to reset the rate on adjustable-rate mortgages (ARMs) were much lower than the rates off of which fixed-rate loans were benchmarked.

At this point, fixed-rate mortgages (FRMs) had become prohibitively expensive for many households, even those with two wage earners. Adjustable-rate mortgages lenders often qualify new borrowers for a loan based on the initial coupon payment.

They allowed many first-time buyers to purchase a home they could not otherwise afford.

From the lender’s standpoint, an ARM was a powerful asset/liability management tool

The coupon interest rate on an ARM is repriced at regular intervals at current market interest rates (ignore for a moment the effect of periodic and lifetime caps), thereby tying the yield on loan to the cost of funding it. To be sure, there were almost always some mismatches.

Sometimes interest-bearing liabilities repriced or matured more or less frequently than did mortgages and other interest-earning assets.

On other occasions, periodic or lifetime rate caps prevented a lender from resetting the yield on an ARM to the current market rate of interest.

Finally, some of the indices (e.g., the COFI index) used in the repricing…



Mark Justin

Interest in FinTech, Deep Tech, Social Psychology, Neuroscience & Neuropsychology, Health and Longivity, and Global Polictics.