Interesting article on questionable borrowers and foreclosures:
http://www.csmonitor.com/2007/0302/p01s02-usec.html
Many people are often taken by the low rates of an ARM. It makes sense. ARMs are cheaper and they are a very cool product. But incorrectly used, they can spell disaster. Over time, the rate of the loan will increase. It may have started out at 4% or so, but after it starts to increase, it might eventually before 8% or 9% or more. Your payment will increase as well. For people who could barely afford the payment at 4%, when it reaches 8% or more, they often have trouble meeting their mortgage payment.
ARMs aren't evil as some might have you believe. In the world of investing, we have something called a "time horizon". That refers to the time in the future when you plan to exit from your investment. In the case of houses, the time horizon will be the year when you sell your home. As a real estate investment advisor and loan officer, I ask my clients "when do you think you will sell your home?". In essence, I am trying to determine their time horizon. I ask other questions such as, do you plan to have children in this home? How likely will you be to change jobs and other questions to gauge my clients' time horizons. Given that information, I make a recommendation and outline the pros and cons to each option. If my client is sure that their time horizon is just a few short years, and the rates are low enough, I have recommended the ARM and it makes sense for these people.
Unfortunately, people seem to like to use the ARM to qualify for homes they shouldn't be buying. For instance, for people who can't afford the payment for a 30-fixed loan, they see the ARM as a really neat way to get the home cheaper. You cannot have a long time horizon if you are getting an ARM! You really need to either sell or think about refinancing around the time when the rate starts to adjust.