Call for Adjustable Mortgages Jumps

The portion of U.S. home buyers opting for adjustable-rate mortgages almost doubled in 2004 as surging home prices spurred more people to borrow at lower interest rates with shorter fixed periods.

The market share of purchase loans with adjustable rates, or ARMs, increased to 34% from 19% in 2003, mortgage company Freddie Mac said. It was the highest annual percentage since 1994, when the rate was 39%.

Although the shift to ARMs has buoyed the U.S. housing market by enabling people to borrow at initially lower rates, it leaves consumers vulnerable to a rapid rise in rates once the introductory period is over, said Susan Wachter, a professor of real estate at the University of Pennsylvania.

“This is an early-warning sign of potential dangers to come,” Wachter said. “The surge in ARMs opens a larger percentage of the population to vulnerability to short-term rate increases.”

ARMs pose a higher risk of foreclosure, when lenders seize homes after owners fall behind in mortgage payments. The number of “prime” ARMs in foreclosure, lent to the most credit-worthy borrowers, was 0.57% in the third quarter, compared with a rate of 0.42% for prime fixed-rate loans, the Mortgage Bankers Assn. in Washington said.

The average U.S. rate for a one-year ARM probably will climb to 4.65% this year from 3.9% in 2004, Fannie Mae, the largest mortgage financier, said Dec. 21. The average fixed rate probably will be 6.01% in 2005, compared with 5.85% last year, the second lowest in 38 years.

Two of every five ARMs in 2004 were so-called 5/1 hybrids -- loans that have a fixed rate for five years, then revert to a traditional one-year adjustable mortgage, said Frank Nothaft, Freddie Mac’s chief economist.

Because the loans have become so popular, the mortgage company will begin reporting average U.S. rates for the product in its weekly mortgage survey beginning this week, he said.

The highest ARM market share was in 1984, the first year of the survey, when the proportion was 62%, Nothaft said.

U.S. home prices climbed 13% in the third quarter, the fastest pace in 25 years, the Office of Federal Housing Enterprise Oversight said.