A kind of mortgage that helped cause the housing crash is surging in popularity. Here's why it's different this time.

• Adjustable-rate mortgages are surging in popularity despite their role in the 2008 housing crash.

• But their re-emergence is no cause to worry as lending standards have since tightened.
• Experts say the mortgage industry is in a safer space today for both borrowers and lenders.

A mortgage product that helped trigger the 2008 housing crash is becoming popular again— but this time it's different.

Adjustable-rate mortgages — also known as ARMs — are home loans with an interest rate that adjusts over time depending on the fluctuation of market rates. They're less predictable than fixed-mortgages as they tend to change periodically and are considered risky as borrowers run the chance of paying much higher mortgage payments than they may have originally budgeted. 

"Adjustable rate mortgages aren't inherently bad but the large share of borrowers during the last cycle with these loans caused problems," Ali Wolf, the chief economist for Zonda, a homebuilding prop tech company, told Insider. "During the mid-2000s housing boom, roughly 35% of all mortgages were adjustable rate. This meant that when interest rates reset, there were a lot of homeowners unable to service their new monthly mortgage payment." 

In the Covid-19 housing market, ARMs have regained momentum as the Federal Reserve's rate hikes put upward pressure on mortgage rates. According to the Mortgage Bankers Association, applications for ARMs have now reached the highest level since 2008 – a fourteen-year high – and are expected to continue rising.  

"More borrowers continue to utilize ARMs to combat higher rates," Joel Kan, MBA's associate vice president of economic and industry forecasting, said in a statement, adding that the share of ARMs has increased to 11% of overall loans.

This growth has some people worried as ARMs played a key role in the 2008 housing crash. In the period that led up to the implosion, many subprime lenders enticed borrowers with interest-only ARMs that initially sported low rates. When rates began to soar, it created an affordability crisis that pushed many borrowers into foreclosure. Although ARMs reemergence is causing whiplash — there's no need to fret in 2022. Lending standards have tightened and that means today's borrowers aren't walking through a financial minefield. 

"The mortgage market has shifted dramatically since 2008," Jude Landis, vice president of single-family risk management at Fannie Mae, said in a statement. "Improvements in underwriting, technology, and quality controls – some visible, some less so – have resulted in a fundamentally sounder mortgage system than before the crisis of 2008."

Lending standards have tightened since 2008

The new ARM comes equipped with a whole new set of underwriting guidelines that make it harder for borrowers to end up in foreclosure — and it's thanks to the Dodd-Frank Act.

The Act was created as a direct response to the financial crisis of 2008. It's hyper-focused on addressing sectors of the financial system that contributed to the economic turmoil, including the banking, lending and credit industries.

As subprime mortgage lenders faced a significant share of the blowback from the crisis, Congress aimed to regulate the industry by building new protections like the Consumer Financial Protection Bureau, which supports the financial interests of borrowers. Additionally, regulations like the ability-to-repay and qualified mortgage rules placed stricter guidelines on lenders. 

Although some of the Dodd-Frank Act has been rolled back, today's financial sectors are in a much healthier place than the Wild West of 2008. This means borrowers are better protected from the predatory lending practices that put the housing market in hot water years ago. 

"Lenders have strengthened their mortgage origination processes, including improved underwriting and collateral assessment," Landis said. "Additionally, appropriate regulations, such as the ability-to-repay and qualified mortgage rules, have formed guardrails for mortgage lending standards that did not exist 10 years ago."

According to Landis, the mortgage industry has evolved into a fundamentally healthier space for both borrowers and lenders —  and that means ARMs comeback is no cause for worry.