More Buyers Likely to Consider ARMs Again
August 31, 2017
The market share of adjustable-rate mortgages is slowly rising and will likely gain more popularity as fixed-rate mortgages increase over the coming year, says Archana Pradhan, CoreLogic’s senior professional economist, on the company’s Insights blog.
The current market share of ARMs has fluctuated between 5 and 13 percent. They rise when fixed-rate mortgages increase and fall when those rates fall. In the first quarter of this year, ARMs accounted for 8 percent of originations. In mid-2005, ARMs represented 45 percent of the market share.
More buyers who are borrowing larger sums of money are reaching for ARMs. Forty-seven percent of mortgages that were originated during the first quarter of this year with balances in the excess of $1 million were ARMs, up 4 percentage points from the previous quarter. ARMs comprised about 13 percent of the market share in the $400,001 to $1 million range, up 3 percentage points from the fourth quarter of 2016. However, the ARM share was just 4 percent in the first quarter for mortgages in the $200,001 to $400,000 range.
Pradhan says borrowers tend to favor ARMs when they are income-constrained or because they prefer the lower rate relative to fixed-rate mortgages, particularly when there is a big difference between the two types of rates.
ARMs earned a bad reputation during the housing crisis. Loose underwriting standards during the housing boom allowed some loans to be written without full documentation or verification that borrowers could ever repay the loan. Also, option ARMs allowed borrowers to choose whether to make a full payment, interest only, or even a partial interest payment (known as negative amortization).
But ARMs in the current marketplace are different. Almost all conventional loans, including for ARMs and fixed-rate mortgages, are fully documented, amortizing, and issued to borrowers with credit scores above 640, Pradhan notes. In the first quarter, the average credit score of a borrower with an ARM was 765, higher than a 753 average for borrowers with fixed-rate mortgages.
“ARMs today have much lower credit risk than ARMs of a decade earlier, and in addition, have lower risk attributes than today’s [fixed-rate mortgages],” Pradhan writes.
Source: “The ARM Will Rise Again … Probably,” Mortgage News Daily (Aug. 30, 2017) and “Is the Adjustable-Rate Mortgage Making a Comeback?” CoreLogic Insights Blog (Aug. 24, 2017)
Updated: February 21, 2020