Adjustable-Rate Mortgages Are Back, But They’re Not Like You Remember

Soaring interest rates have revived demand for adjustable-rate mortgages. But these loans bear little resemblance to those blamed for fueling the 2008-09 financial crisis.

Applications for ARM, a type of mortgage with a lower rate in the early years of a loan, more than doubled in April from a year earlier, according to the Mortgage Bankers Association. More than 9% of mortgage applications filed last week were for adjustable-rate mortgages, up from 4% a year ago.

ARMs still make up a small portion of the mortgage market – 2.1% in March, according to the Urban Institute, up from 0.6% a year earlier. They account for half of all mortgages at their pre-peak peak.

Their refreshing resurgence is another sign that rising rates are forcing homebuyers. However, mortgage industry executives say there is little reason to fear a repeat crisis. Loans today — and borrowers — are much safer than in pre-crisis years, when lenders made loans at much lower interest rates to borrowers under at a lower interest rate than they claim.

“The type of borrowers that qualify for these ARMs today are significantly different from the borrower profiles we saw qualify in 2006, 2007,” said Pat Sheehy, chief executive officer of Hamilton Home Loans. 2008,” said Pat Sheehy, chief executive officer of Hamilton Home Loans.

Mr. Sheehy began offering 5, 7 and 10 year ARMs earlier this year, when the cost of variable rate loans dropped significantly below the average for a 30 year fixed rate mortgage. .

Customers who were approved by Hamilton for variable-rate loans had an average credit score of around 750, said Sheehy, compared with an average of 730 for applicants approved for mortgages in the area, Mr. Sheehy said. 30 years.

Mr. Sheehy said nearly 11% of mortgages were taken by Hamilton in the six weeks since Sunrise, the Fla. started offering adjustable rate ARMs. He expects that rate to hit 15% to 20% this year.

Adjustable-rate mortgages became popular in the years leading up to the 2008-09 crisis, when home prices rose steadily and lending standards lax.

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Lenders have entice borrowers with exceptionally low introductory interest rates, which greatly reduce initial mortgage payments, allowing homebuyers to stretch their budgets. Some borrowers easily qualify for interest-only loans, even if their income makes them unable to afford larger principal payments. “

When loans were later reestablished, many borrowers could not afford the higher payments and were forced to sell. Plunging home prices left many Americans drowning in mortgages. Foreclosures skyrocketed. Banks, mortgage lenders, and investors who hold securities tied to mortgages face huge losses.

Post-crisis regulations have dramatically cut ARM’s services and increased borrower protections. Short-term referral rates have been banned and annual increments are limited. Lenders and service providers must notify borrowers in writing of upcoming rate changes. And lenders can no longer penalize borrowers who refinance ARM or repay loans early.

Borrowers applying for ARM today must be able to make monthly payments significantly higher than the original rate. And it has become much harder for subprime borrowers to get any kind of mortgage. According to the Federal Reserve Bank of New York, about 2% of mortgages issued in the first quarter of 2022 went to borrowers with credit scores below 620, down from about 13% in three months. early 2005.

These days, banks tend to keep ARM on their books. In the years before the financial crisis, they were often packaged and sold to investors.

According to Bankrate.com, average interest rates on adjustable mortgages last week ranged from 3.63% to 5.24%, depending on loan terms. The site’s average rate for a 30-year fixed-rate mortgage was 5.45% over the same period.

According to the Federal Reserve Bank of Atlanta, higher interest rates on 30-year mortgages have helped boost mortgage payments to more than $300 by 2022. The average American household needs 38.6 % of her income to cover the payments on a median-priced home in March. This is up from 32.6% at the end of 2021 and the highest level since August 2007.

According to Redfin Corp, a real estate brokerage, the amount of savings borrowers can gain by choosing ARM hit its highest May level since at least 2015.

Borrowers pay about $15,600 less over five years — or $260 a month — with what’s known as a 5/1 ARM. This type of adjustable-rate loan offers a discounted interest rate for five years before resetting annually.

Write to Orla McCaffrey at orla.mccaffrey@wsj.com

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Edmund DeMarche

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