Magazine article American Banker

Adjustable Mortgages Soar to More Than Half of Market

Magazine article American Banker

Adjustable Mortgages Soar to More Than Half of Market

Article excerpt

WASHINGTON -- Adjustable-rate mortgages, shunned by consumers in the early 1990s, are once again the home loan of choice.

Some 55% of new mortgages in November carried adjustable rates, up from 49% in October and less than 20% a year earlier, according to the Federal Housing Finance Board.

The dramatic increase stems in part from rising interest rates. In times of higher rates, consumers typically look more closely at adjustables because their rates, at least initially, are markedly lower than those of fixed loans.

In addition, expert say, adjustables are getting a boost from a structural shift in the mortgage industry. Commercial banks have been storming into the market, often through acquisitions, nd they have exhibited voracious appetites for adjustables.

As a result, some of the recent gains may prove to be permanent.

"ARMs in general will represent a larger portion of the market than they have in the past," said Arthur D. Ringwald, executive vice president of residential lending at Bank of America.

Consumer acceptance of the loans has risen, he said. And, with the increased participation of banks, "a lot of marketing muscle has been added to ARMs."

In fact, Mr. Ringwald said he expects the loans to thrive in "all economic environments."

Adjustables were hardly winners over the past several years. After grabbing nearly 65% of the market in 1988, the loans declined steadily, to 20% of all mortgages in 1993.

Why? Consumers were flocking to fixed mortgages to lock in the lowest interest rates in a generation. And mortgage banking companies, which typically specialize in fixed mortgages, aggressively supported the trend.

Now, however, rates on fixed mortgages are averaging 9.4%up from 7.3% a year ago. Initial rates on adjustables are also up -- but remain more than 2.5 percentage points below those of fixed loans. …

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