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Hybrids Shake Up Jumbo ARM Loans

If you are investing in or servicing jumbo hybrid ARMs, you might find that the length of the fixed-rate period is a clue to how well the loans will perform, according to a recent study by Fitch Ratings.

An analysis of prime-quality, jumbo-sized, hybrid adjustable-rate mortgages suggests that their performance is similar to that of prime-credit, jumbo fixed-rate loans - as long as the initial fixed-rate period is five years or longer.

The rating agency's analysis found that the performance of jumbo ARMs with a fixed-rate period of five years or more and found that they performed similarly to fixed-rate jumbo mortgages.

However, the study also found that jumbo hybrid ARMs with a fixed-rate term of three years have underperformed the fixed-rate loans - even well before the third year reset.

"Delinquencies of 60 days or more as a percentage of original balance have indicated that those borrowers who finance a home with a short-term hybrid ARM for affordability reasons are more adversely selected and will have a greater payment shock risk and, therefore, a higher propensity to default than those with an FRM or longer-term hybrid ARM," Fitch said in a recent report on jumbo hybrid loans.

However, Fitch noted that the hybrid ARM product is still fairly new to the jumbo market and has not been tested through an extended rising rate environment.

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