Financial institutions jump into ARMs amid high rates

Homepoint, Credit Union of Southern California rolled out ARMs this week

At least two financial institutions brought back adjustable-rate mortgage (ARM) products this week amid surging mortgage rates and double-digit home price growth.

Michigan-based wholesale lender Homepoint rolled out a jumbo ARM product offering a maximum loan amount as much as $2.5 million, with a maximum loan-to-value ratio of 80%. Homepoint’s jumbo ARMs have a seven- or 10-year fixed-rate period and the loan adjusts every six months, according to Homepoint. 

Credit Union of Southern California’s interest-only ARMs, in which the borrower delays paying down any principal for a period of time, are now available as purchase or refinance loans. The rates are offered in five- and seven-year terms for primary residences $3 million and under, or for second homes for $2.5 million and under, it said. 

“Homebuyers today have a stronger interest in adjustable-rate mortgages because they provide a solution to affordability issues caused by the recent increase in interest rates,” Phil Shoemaker, president of originations at Homepoint, said in a statement. 

Applications for ARMs rose 10.8% this month, a 14-year high, compared to just 3% at the beginning of the year, according to the Mortgage Bankers Association. MBA’s most recent data showed ARMs represented 9.4% of overall applications last week. 

“As rates have moved higher, ARM loans have gotten more attractive to borrowers because it gives them a lower monthly payment,” said Joel Kan, associate vice president of economic and industry forecasting at the MBA. “Borrowers are certainly looking to gain any kind of advantage they can.”

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While financial institutions are taking note of the increased attention for ARMs, some loan officers said many consumers think the cost to get ARMs is not worth the risk compared to a 30-year mortgage rate.

“The conventional 30-year mortgage rate would have to be in the mid- to high-5% range for the ARM to be in the high-3% range,” said a loan officer in Washington. “That’s where it would make sense for a 5/1 ARM. If we can get that, to me saving a percent, yes, that’s beneficial. But is it really worth the cost of it?”

The interest rate for a five-year ARM averaged 4.20% the week ending Wednesday, according to the Freddie Mac PMMS. A conventional 30-year fixed rate purchase mortgage was just 90 basis points higher at 5.1%. 

Applications for ARMs rose this year for the first time since interest in ARMs waned due to the role they played in the housing crash of 2008. Leading up 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 soar starting in 2005, increased foreclosure rates led to a housing market crash in 2008. During the mid-2000s housing boom, about 35% of all mortgages were adjustable-rate, according to Ali Wolf, chief economist at homebuilding prop-tech company Zonda.

After the housing market crash, new underwriting guidelines were issued for ARMs to make it harder for borrowers to end up in foreclosure, industry experts have said.

The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, created in direct response to the financial crisis, also makes the mortgage industry different from 14 years ago, according to market watchers. The Dodd-Frank Act requires lenders to check a buyer’s ability to repay, which protects them from predatory lending practices.

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