Adjustable-Rate Mortgages Lose Their Appeal
Hurt by low single-digit rates on fixed-rate home loans, adjustable-rate mortgages dropped in popularity in July to their lowest levels in nearly 2 1/2 years, the Federal National Mortgage Assn. reported Thursday.
Prospective home buyers nationwide shunned ARMs to the point where they accounted for only 19% of total U.S. mortgage applications last month, the lowest level since April, 1987, reported the association, better known as Fannie Mae. That is far below their shares of as much as 70% in 1984 and 63% in January of this year, Fannie Mae said.
“It’s really is a fixed-rate market right now,” said David W. Berson, Fannie Mae’s chief economist.
The decline has great significance to the savings and loan industry, particularly in California, where thrifts originated adjustable-rate mortgages and are its biggest backers. The ARM was developed in the early 1980s to reduce thrifts’ risks to fluctuating interest rates, but many S&Ls; in California--while still predominantly offering ARMs--have been forced to offer more fixed-rate loans to satisfy the demand and stay competitive.
“There’s no question we are doing more fixed-rate lending than in the past,” said Sam Lyons, senior vice president and head of mortgage banking at Great Western Bank. Fixed-rate loans now account for about 15% of its total home loans, up from less than 3% not too long ago, Lyons said.
‘Teaser’ Rates Eliminated
Some major California savings and loans, such as Home Savings and California Federal Savings, also have eliminated deepest discount introductory “teaser” rates on the loans. Others offer a greater array of hybrid products that combine elements of fixed and adjustable loans, or are increasingly acting like mortgage bankers, making fixed-rate loans but selling them to buyers such as Fannie Mae.
“Lenders that traditionally stayed away from mortgage banking have gotten back into it with fixed-rate loans,” said Kirk Hallahan, spokesman for the California League of Savings Institutions in Los Angeles.
The decline in ARMs is largely attributable to the fact that rates on fixed loans have fallen faster than on adjustables in recent months. The average rate on 30-year fixed-rate loans fell in July to 9.73%, their lowest level since 9.25% in March, 1987. That compared to an average rate of 8.66% for ARMs in July.
That spread of just over one percentage point between fixed and adjustable rates compared to a difference of 2.6 percentage points a year ago, Fannie Mae’s Berson said.
“That’s an awfully big drop,” Berson said. “It really does fully explain why there is a tremendous shift to fixed loans from adjustables.”
A key question now, many analysts say, is whether the trend will continue. Fixed-rate mortgages have risen in recent days, to a national average of 9.85% this month. Meanwhile, rates for adjustable mortgages continued to fall in August, to 8.51%.
Gayle Morris Sweetland, a spokeswoman for Home Savings, said recent rises in fixed rates led to a slight decline in those mortgages last week. She said that only between 10% and 15% of the giant S&Ls; loans are fixed-rate loans, although before January, 1988, Home Savings didn’t offer fixed-rate loans at all.
