As mortgage rates soared in May, ARMs doubled

Lenders and borrowers alike are embracing ARMs as interest rates skyrocket

A panel of experts assembled at a recent Mortgage Bankers Association (MBA) conference in New York predicted that adjustable-rate mortgages (ARMs) will become far more popular this year as purchase mortgages increasingly dominate a housing market contending with fast-rising interest rates.

A June market report by a major digital mortgage-exchange and loan-aggregator, MAXEX, which offers an overview of loan-trading activity through the exchange for May, confirmed the MBA panel’s projections. The exchange, founded in 2016, averages about $1 billion per month in non-agency loan-trading volume and counts J.P. Morgan among its investors.

“There was too much 30-year [fixed-rate mortgage paper] out there in the market for a while because it was just so cheap, and it was the right thing for the consumer,” said Matt Tomiak, senior vice president of nonagency originations at Bayview Asset Management.

Tomiak was one of the four MBA panel members who addressed an audience of loan originators and other industry players gathered at the New York Marriott Marquis hotel near Times Square last month. The topic of the panel discussion: “What’s New in Non-Agency?”

“I think we’ll be seeing a lot more ARMs shortly,” Tomiak added.

That also was the consensus forecast of the four-member panel of non-agency industry experts who spoke at the MBA’s Secondary and Capital Markets Conference & Expo in New York City. The recent MAXEX market report provides evidence supporting the panel’s prediction of a rising demand for ARMs in the face of rising interest rates — propelled by the Federal Reserves monetary-tightening policy. 

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“Adjustable-rate mortgage trading volume soared in May with nearly half of the loans locked through the exchange coming in the form of an ARM loan,” according to the recently released June MAXEX report. “Interest rates on ARM loans through the exchange were as much as a full point lower than 30-year fixed rates, making them extremely attractive to homebuyers who are trying to battle ever-appreciating home prices. 

“This trend is only expected to continue through June as three more MAXEX buyers are adding ARM programs and pricing, offering sellers the opportunity to take advantage of the growing market.”

The network of players on the MAXEX exchange includes 320 bank and nonbank originators as well as more than 20 “high-profile investors,” according to the loan-trading platform’s report. Those exchange originators were behind explosive growth in ARM loans, which more than doubled in May, making up 49% of purchase volume versus 23% in April, according to the MAXEX market report.

“Spreads between fixed-rate and ARM loan interest rates eclipsed 100 basis points during the month, making ARM loans extremely attractive to borrowers,” the report states. “This is only expected to increase as MAXEX buyers implement additional ARM pricing options for lenders on the exchange.”

MAXEX reported the most popular ARM was the 7-year note, which made up 54% of the exchange’s ARM volume in May. ARMs sold on the MAXEX exchange have rates that adjust every six months following the initial fixed-rate term of 5, 7 or 10 years.

“What has started to salvage purchase originations is lenders and investors leaning into ARM loans,” MAXEX’s June market report states. “As long as ARM rates remain at least 50 basis points in rate lower than a 30-year fixed-rate loan, we can expect to see significant volume trade through the exchange as three buyers on the exchange are expanding their ARM pricing options.”

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