Hybrids Now Dominate the ARM Market

Hybrid adjustable-rate mortgages are becoming more popular with consumers and lenders, according to a Federal Reserve Board survey of senior loan officers.

The July survey found that more than 50% of the respondent banks reported that hybrid ARMs accounted for 75% or more of their ARMs originations over the past three months.

Another 17% of respondents reported that hybrid ARMs accounted for 30% to 75% of their ARM originations.

ARM originations comprised over 30% of all mortgage originations in July, according to mortgage application data compiled by the Mortgage Bankers Association.

Hybrid ARMs have an initial fixed-rate period of three, five, seven or 10 years before converting to a one-year ARM. The interest rates on conventional ARMs adjust at least once a year.

The Fed survey shows that bankers prefer to hold hybrid ARMs on their books more than one-year ARMs.

Only 12 of the respondents said one-year ARMs make up more than 50% of the home loans on their books. However, 30% of respondents reported that hybrid ARMs make up more than 50% of their mortgage portfolios.

The loan officers estimate that 90% of the conventional ARMs will reprice within the next 12 months. "In contrast, banks estimate that on average only 12% of hybrid ARMs will be repriced within one year. Almost 60% of hybrid ARMs on average will not be repriced for at least three years," the Fed said.

The Fed surveyed loan officers at 50 U.S. banks.

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