Adjustable rate mortgages (ARMs) are rising to a popularity reminiscent of the pre-crises era, but lenders assure that the times have changed in terms of the borrowers they offer these loans to, according to The Wall Street Journal.
While previously, the popularity of ARMs hinged upon their low initial rates, now financial executives quoted in the WSJ article say they are focusing on borrowers with “strong credit” who are using the loans to take out jumbo mortgages.
During the fourth quarter of 2013, ARMs comprised 31% of mortgages in the $417,001 to $1 million range—up from 22% a year earlier and the largest proportion since 2008, according to data cited in the article by Black Knight Financial Services.
The rise in ARM utilization arrives seven years after the start of the housing crisis, during which between 22%-25% of subprime ARMs were in foreclosure each quarter from the start of 2009 through 2011, WSJ notes.
But while lenders say they have been tightening lending guidelines and focusing mostly on “well-heeled” borrowers for ARM loans, some smaller lenders and credit unions are targeting retirees and other borrowers that are in the market for low rates.
“It’s only natural in this part of the cycle…that the banks are starting to rethink their conservatism,” said Todd Hagerman, an analyst at brokerage firm Sterne, Agee & Leach, who was cited in the article. “There are ways they can loosen the lending standards to generate more growth yet keep a pretty tight rein such that the risk profile of the company is not changing overnight.”
Written by Jason Oliva