Adjustable-rate mortgages (ARMs) have gained in popularity among borrowers seeking home loans from large banks, according to a new data report from the Federal Reserve Bank of Philadelphia.
Conventional ARMs accounted for 25.1% of large bank first mortgage originations in the first quarter of this year – in comparison, they accounted for only 7.8% in the first quarter of 2021 when average first mortgage origination interest rates reached a series low. During the first three months of the year, large bank total conventional ARM balances climbed for a 12th consecutive quarter, reaching a series high of $344.3 billion.
“With historically high home prices and average mortgage origination interest rates approaching a series high, buyers are searching for cost relief in the form of adjustable-rate mortgages,” said the report. “Unlike fixed-rate mortgages, ARMs often offer a ‘teaser’ fixed-rate term at origination before converting to a variable rate. Initial rates are typically lower than those offered on traditional fixed-rate loans. When the initial fixed rate expires, ARM monthly payments become subject to current market interest rates.”
While acknowledging that loans originated at lower rates than prevailing market rates could be prone to larger payment shocks, the report noted that banks have prepared for that occurrence.
“Future reset risk is mitigated by large banks’ continued focus on lending to borrowers with high credit scores and low leverage, and, according to Intercontinental Exchange (ICE), a marketwide shift to longer initial ARM reset periods,” the report continued. “While growth in ARM balances has begun to change portfolio composition at large banks, portfolio quality remains strong, buoying overall credit performance. The 30, 60, and 90 plus delinquency rates continue to hover near series lows.”
