Financial institutions move into ARMs amid high rates
At least two financial institutions this week brought back adjustable-rate mortgage products (ARMs) amid soaring mortgage rates and double-digit growth in house prices.
Michigan-based wholesale lender Attachment point deployed a jumbo ARM product offering a maximum loan amount of $2.5 million, with a maximum loan-to-value ratio of 80%. Homepoint’s jumbo ARMs have a fixed rate period of seven or 10 years and the loan adjusts every six months, according to Homepoint.
Credit Union of Southern California’s Interest-only ARMs, in which the borrower delays repayment of principal for a period of time, are now available as purchase or refinance loans. Rates are offered over five and seven years for primary residences $3 million and under, or secondary residences $2.5 million and under, he said.
“Homebuyers today have greater interest in variable rate mortgages as they provide a solution to affordability issues caused by the recent increase in interest rates,” said Phil Shoemaker, President of the Fixtures. at Homepoint, in a statement.
ARM requests rose 10.8% this month, a 14-year high, from just 3% at the start of the year, according to the Mortgage Bankers Association. The most recent MBA data showed that ARMs accounted for 9.4% of overall apps last week.
“As rates have risen, ARM loans have become more attractive to borrowers because they offer them a lower monthly payment,” said Joel Kan, associate vice president of economic and industry forecasting at the MBA. “Borrowers are certainly looking for any kind of advantage they can get.”
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As financial institutions take note of the increased attention to ARMs, some loan officers said many consumers believe the cost of obtaining ARMs is not worth the risk compared to a 30-year mortgage rate.
“The conventional 30-year mortgage rate would need to be in the mid to high 5% range for the ARM to be in the high 3% range,” a loan officer in Washington said. “That’s where it would make sense for an ARM 5/1. If we can get that, for me saving one percent, yes, that’s beneficial. But is it really worth it?”
The interest rate for a five-year ARM averaged 4.20% in the week ending Wednesday, according to the Freddie Mac PMM. A conventional 30-year fixed rate purchase mortgage was only 90 basis points higher at 5.1%.
Applications for ARMs increased this year for the first time since interest in ARMs declined due to the role they played in the 2008 housing crash. Prior to the housing crisis, many subprime lenders provided borrowers with interest-only ARMs, which initially offered low rates. Some buyers who couldn’t qualify for a conventional mortgage turned to an ARM to make lower monthly payments.
But when rates began to skyrocket from 2005, rising foreclosure rates led to a housing market crash in 2008. During the mid-2000s housing boom, around 35% of all loans mortgages were adjustable, according to Ali Wolf, chief economist at homebuilding. accessory technology company Zonda.
After the housing market crash, new underwriting guidelines were issued for ARMs to make it harder for borrowers to find themselves in foreclosure, industry experts said.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, created in direct response to the financial crisis, also makes the mortgage industry look different from 14 years ago, market watchers say. The Dodd-Frank Act requires lenders to verify a buyer’s repayment capacity, which protects them from predatory lending practices.