The rebirth of the adjustable rate mortgage

After a long period of dormancy, ARMs are re-emerging

The rebirth of the adjustable rate mortgage

In the middle of a global pandemic, a refi boom, and one of the hottest housing markets in living memory, this industry let a few things fall by the wayside. Tools and products that were an ordinary part of the mortgage wheelhouse have been unused simply because 30-year fixed rate mortgages have come in at such great rates. One such tool is the adjustable rate mortgage (ARM). Some ARM programs were even suspended by some of the nation’s largest wholesalers in 2020, only to be reintroduced recently.

To understand why ARM products fell by the wayside, and why they’re being brought back now, MPA spoke with Jeff Gravelle (pictured), chief production officer at Newrez LLC, a nationwide lender with retail, wholesale, joint venture and correspondent channels. He explained what changed in terms of ARM utility over the past year and how in a housing market being shaped by first-time homebuyers, mortgage professionals can win out by getting back into ARM lending again.

“With rates at all-time lows for an extended period of time, locking in a low rate for 30 years has been super attractive for homeowners and borrowers,” Gravelle said. “The other side of that is ARMs are more valuable for borrowers in periods where yield curves are steeper. In the past year and a half, the yield curve has been really flat but we track the difference in yield spread between two-year and 10-year notes and the wider that spread is, the better ARMs will do.”

Gravelle explained that as the yield curve has steadily steepened through the end of 2020 and into 2021, the monthly savings on an ARM loan, which used to be below $100 and therefore not worth the rate fluctuations for most borrowers, are now hitting in the hundreds of dollars per month, or thousands a year. As that picture changes, ARM loans become more attractive to a certain borrower class.

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Gravelle described the ideal ARM borrower as the one who isn’t laying permanent roots. The first-time homebuyers who are buying to get into the market, but will want to upgrade out of the starter home when they have kids. These borrowers will take the savings on their monthly payment that comes with the ARM loan before making the move up to their ‘forever home’ and the 30-year fixed. What comes with that, though, is the need to closely monitor the rate situation and ensure that the right moves are being made before the monthly payment spirals out of control.

As first-time homebuyers struggle to get offers accepted with 30-year fixed loans, Gravelle noted that ARM products can help. Marketing on that lower payment and the potential for a buyer to ride house price appreciation into their next home could make the difference for brokers and originators looking to increase their volume in a tight market.

“Brokers are super savvy,” Gravelle said. “And professionals in this business are good at meeting demand with the products that can serve their customers best. And even though ARMs have been dormant for a while, anyone that’s been in the business for 10 years or more knows when to pivot to product to serve their customer needs. As markets change and the curve either continues to steepen or stays where it is now, it’s going to be more prevalent.

“I think the industry in general has a lot of hustle and markets will meet the demand of consumers. Right now, especially with elevated housing prices, we’re going to see more ARM products because the market knows how to deliver value to customers.”