Your Mortgage : Time Will Tell on Newfangle ARMs
One of the nation’s largest mortgage lenders has begun offering a new type of adjustable-rate mortgage, but some of its chief competitors and other financing experts aren’t sure whether the newfangled ARM will catch on with borrowers.
Great Western Bank, the second-largest mortgage lender in California and one of the five largest in the United States, has begun offering an ARM with an interest rate that rises and falls based on changes in the federal Cost of Funds Index--a new rate indicator tied to the monthly average interest rate on Treasury bills and Treasury notes.
The index will be compiled and published each month by the Federal Home Loan Mortgage Corp., a quasi-government agency that was formed several years ago to help make more home loans available to the public.
The new index is similar to the 11th District Cost of Funds Index, a composite indicator that reflects the rates that about 150 saving and loan associations in the West pay on savings accounts, checking accounts and other types of deposits.
The 11th District COF has been published monthly by the Federal Home Loan Bank of San Francisco for about 10 years. It has been especially popular with borrowers because its composite nature prevents it from being subject to sharp swings.
Officials at Great Western think that the new federal index will also prove popular, in part because it’s even more diversified than the 11th District COF.
“The new index won’t be overly sensitive to the interest rates being charged in any one single part of the country,” said Sam Lyons, Great Western’s senior vice president. “You can’t say that about the 11th District Cost of Funds Index.”
Initially, ARMs linked to the new federal index look a bit more attractive than ARMs based on the 11th District COF.
The federally linked ARMs that Great Western began offering two weeks ago start with a 7.6% interest rate, compared to the 7 3/4% rate on loans pegged to the 11th District. On a $150,000 loan, the lower rate would save the borrower about $15 a month.
In addition, the margin that Great Western charges on loans linked to the federal index is slightly lower than the margin it charges on 11th District ARMs, which would reduce monthly payments by another $15 or so.
The margin is the lender’s retail markup: If the index rate is 8% and the margin is two points, your interest rate will be 10%.
Only time will tell whether borrowers who take out loans linked to the new federal index will fare better or worse than home buyers who opt for ARMs hooked to the 11th District COF. That’s because the new federal index will move up or down based on the federal government’s own borrowing costs.
If the price of Treasury bills and Treasury notes go up, the federal index will slowly rise too. If prices for T-bills and T-notes fall, the index will drop accordingly.
Although all lenders can begin offering ARMs based on the new federal index, most say they’ll wait to see how Great Western fares.
“With all the different types of loans and indexes that are already available, I’m hard pressed to see why we need another one,” said Angelo Mozilo, president of mortgage-banking giant Countrywide Funding.
“If consumers don’t see some huge upfront savings from the new loan, I don’t think that it’ll catch on. For now, we’ll just stick with the products we already offer.”
Still, some industry experts say that introducing an ARM linked to the new index could prove to be a shrewd marketing move that will help Great Western expand its market share outside of its home base in California.
The company became one of the West’s largest lenders by promoting ARMs linked to the 11th District Cost of Funds in the 1980s.
But as it expanded to other states, Great Western had some trouble explaining to Easterners why they should take an ARM pegged to the borrowing costs of West Coast lenders.
“Offering an ARM that’s linked to a federal index instead of a regional one solves that problem,” said Noel Fahey, director of research for the U.S. League of Savings Institutions.
Lyons admits that offering a “de-Westernized” loan could help attract new borrowers in the East, although he says it wasn’t the only reason the company introduced it.
“The mortgage-lending business has become so competitive that you’ve got to keep coming up with new products if you want to keep expanding your market share,” he said.
“But as we’ve marched around the country, it’s been a challenge to (explain to) people why their ARM should be tied to an index that’s published 2,300 miles away.”
Meet Dave Myers
“Your Mortgage” columnist David W. Myers will be on hand to answer your questions on home financing at several consumer workshops at the upcoming Los Angeles Times Home Buyers and Sellers Fairs.
The fairs will be held Saturday, April 20, at the Anaheim Convention Center in Orange County and Saturday, May 4, at the Shrine Exposition Hall in Los Angeles. Hours are 9:30 a.m. to 5:30 p.m.
