Adjustable-rate mortgages back in demand as rates increase

April 12, 1992|By Phil Roosevelt | Phil Roosevelt,American Banker

NEW YORK -- Adjustable-rate mortgages, deeply out of favor with consumers for the past year, are staging a comeback.

The loans, which typically carry lower initial rates than fixed mortgages, are catching the eye of first-time homebuyers as the springtime market gets under way, lenders and analysts say.

The trend has been reinforced by a steady rise in fixed rates since mid-January.

Gary Gordon, a thrift analyst at PaineWebber Inc., estimates that adjustables will account for 30 percent to 40 percent of all new mortgages by late summer, up from the 15 percent reported for February by the Federal Housing Finance Board.

The February reading was the lowest since the government began tracking adjustables in 1984.

Rising demand for adjustables is good news for big thrifts that specialize in making and holding adjustables.

Mortgage banking companies also are participating in the boom. While historically they have lagged behind thrifts in adjustable-loan origination, mortgage banks now have a more developed secondary market for the loans that is stimulating their origination, said Peter Treadway, a thrift analyst at Smith Barney, Harris Upham and Co.

Mr. Treadway pointed out, for example, that 19 mutual funds have been formed in the past few years to buy adjustable-rate mortgages.

"A return to an ARM market will not be the same devastating event for mortgage bankers that it was in the late 1980s," Mr. Treadway wrote in a recent report.

Countrywide Credit Industries, the largest independent mortgage company, is clearly taking the offensive. Earlier last week, it ran a prominent advertisement in the Wall Street Journal, blaring, "Don't miss out on an affordable ARM!"

Countrywide said its adjustable-rate loan production totaled $750 million in March -- when it funded a record $2.1 billion of home mortgages -- representing 35 percent of total originations.

The rise of adjustables comes as many lenders say the refinancing boom is winding down. In its place, they say, home sales are picking up, particularly to first-time buyers who often find it easier to qualify for adjustables because of their low initial rates.

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