Adjustable rate mortgages are back, but not as you remember them


A rise in interest rates has revived demand for adjustable rate mortgages. But these loans bear little resemblance to those accused of fueling the 2008-09 financial crisis.

According to the Mortgage Bankers Association, applications for ARMs, a type of mortgage that carries a lower rate in the early years of the loan, more than doubled in April from a year earlier. More than 9% of mortgage applications submitted last week were for adjustable rate mortgages, up from 4% a year ago.

ARMs still make up a tiny fraction of the mortgage market — 2.1% in March, according to the Urban Institute, compared with 0.6% a year earlier. They accounted for half of all mortgages at their pre-crisis peak.

Their nascent resurgence is another sign that rising rates are pressuring home buyers. But mortgage industry executives said there was little reason to fear a repeat meltdown. Loans – and borrowers – today are much safer than they were in the years before the crisis, when lenders gave loans with very low interest rates to subprime borrowers on a little more than their word.

“The type of borrower who qualifies for these ARMs today is very different from the borrower profile we saw in 2006, 2007, 2008,” said Pat Sheehy, managing director of Hamilton Home Loans.

Mr Sheehy began offering five-, seven- and 10-year ARMs earlier this year, when the cost of variable-rate loans fell significantly below the average rate for a 30-year fixed-rate mortgage.

Hamilton customers approved for variable-rate loans have an average credit score of about 750, compared to an average of 730 for applicants approved for 30-year mortgages, Sheehy said.

Nearly 11% of mortgages issued by Hamilton in the six weeks since the Sunrise, Fla.-based lender launched the ARM offering carried adjustable rates, Mr Sheehy said. He expects that share to reach 15-20% this year.

Variable rate mortgages became popular in the years leading up to the 2008-2009 crisis, when house prices rose steadily and lending standards were relaxed.


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Lenders lured borrowers with exceptionally low introductory rates that dramatically reduced early mortgage payments, allowing homebuyers to stretch their budgets. Some borrowers easily qualified for interest-only loans, even though their incomes made it unlikely that they could afford larger principal repayments down the line.

When the loans were subsequently reset, many borrowers were unable to afford the higher payments and were forced to sell. Home prices have plunged, leaving many Americans underwater on their mortgages. Seizures surged. Banks, mortgage lenders and investors holding mortgage-related securities suffered massive losses.

Post-crisis regulations have significantly reduced ARM offerings and improved borrower protection. Short-term incentive rates were banned and annual increases were capped. Lenders and servicers must notify borrowers in writing of upcoming rate changes. And lenders can no longer penalize borrowers who refinance an ARM or prepay it.

Borrowers applying for ARMs today must be able to afford monthly payments significantly above the initial rate. And it’s become much harder for subprime borrowers to get any type 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, compared to about 13% in the first three months of 2005.

Banks tend to keep ARMs on their books these days. In the years before the financial crisis, they were often packaged and sold to investors.

Average adjustable mortgage rates last week ranged from 3.63% to 5.24%, depending on the terms of the loan, according to The website’s average rate on a 30-year fixed rate mortgage was 5.45% over the same period.

Higher rates on the 30-year mortgage helped push mortgage payments up more than $300 in 2022, according to the Federal Reserve Bank of Atlanta. A median U.S. household needed 38.6% of its income to cover payments for a median-priced home in March. This represents an increase from 32.6% at the end of 2021 and the highest level since August 2007.

The potential savings borrowers can realize by opting for an ARM hit their highest level in May since at least 2015, according to Redfin Corp., a real estate brokerage firm.

Borrowers pay about $15,600 less over five years, or $260 per month, with what’s called a 5/1 ARM. This type of adjustable rate loan offers a reduced interest rate for five years before being reset each year.

Write to Orla McCaffrey at [email protected]

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