With refinancing business dwindling, lenders increasingly are encouraging homeowners to once again buy into adjustable-rate mortgages, particularly hybrid ARMs, which set at a fixed rate for five to seven years before readjusting, National Mortgage News reported Aug. 19.
Applications for ARMs currently account for 6 percent of mortgage loan requests, a 3 percent increase since the beginning of the year. At their peak in 2004, ARMs accounted for 32 percent of the market.
The spread between average ARM starting rates and 30-year fixed-rate mortgages is widening, making ARMs more attractive to borrowers interested in cutting monthly expenses.
Bob Caruso, an executive managing director at mortgage services firm Lender Processing Services, told National Mortgage News that buyers are doing what they did before the bust — looking for a low monthly payment without understanding the potential future consequences.
Many ARM borrowers were among the first to default during the housing bust when their payments reset at rates they could not afford.
Lenders argue that things will be different this time because of tougher underwriting standards. Plus, regulators have almost completely banned interest-only and balloon mortgages.
National Mortgage News reported that the average fixed-rate 30-year mortgage has gone up 110 basis points, dropping the number of conventional borrowers eligible for refinancing from 90 to 30 percent.
“The low-hanging fruit is gone, so lenders have to dig a little deeper,” Scott Buchta, head of fixed-income strategy at asset management firm Brean Capital, told National Mortgage News. “Lenders are pushing ARMs right now because so many fixed-rate borrowers are out of money.”
Quicken Loans is offering five-year hybrid ARMs at 2.99 percent compared to a 15-year fixed-rate mortgage at 3.37 percent, and a 30-year fixed-rate at 4.5 percent. ARMs now account for around 20 percent of Quicken’s business.
“For many folks, it makes a lot of sense to take a shorter-term product,” Bob Walters, Quicken’s vice president of capital markets, told National Mortgage News. “If the borrower is in a situation where they're not going to be in that home for more than seven years, it would be incorrect for them to take the fixed-rate when the ARM is giving them a benefit of lower monthly payments.”
The National Association of Home Builders reported that most homeowners stay in their homes an average of 13 years, down from 20 years in 2009.
Today lenders have to qualify ARM borrowers at the initial low rate plus 2 percentage points higher or the fully indexed rate, whichever is higher, National Mortgage News reported.