There's a third possibility, of course: that they took a deal that was good. YMMV, but in 1993 I got such a mortgage and it went straight up over the next three years (almost exactly the way the example plays out). During those first few years, my total housing cost was far below what I had been paying for renting; when I sold the place in 2002, I calculated that my total cost was lower than if I'd have taken a straight 30yr in 1993 and that my average cost was still far below renting. Oh, and it was a much nicer place than I'd ever rented. Berkeley rental stock, you might know, is a) expensive and b) very run-down. That's what you (mostly) get with rent control.
/jordan