FHA Adjusts Cap on Hybrid ARM Rate Changes
Federal Housing Administration lenders have a chance to become real players in the hybrid adjustable-rate mortgage market now that HUD has finally modified its 5/1 hybrid regulation.
The Department of Housing and Urban Development issued an interim final rule last month that raises the cap on the annual interest rate adjustment from 100 basis points to 200 bps.
This change allows the FHA to insure hybrid ARMs with an initial interest rate adjustment of 200 basis points after the first five years of the loan. Over the life of the loan, the interest rate cannot go up by more than 600 bps.
Hybrid ARMs are very popular in the conventional market. They offer borrowers an initial fixed interest rate for three or five years before converting to a one-year adjustable rate.
The 100-bp cap on the FHA 3/1 has been fairly successful in the marketplace, but lenders and their investors shied away from the FHA 5/1 hybrids.
Since the start of fiscal year 2005 (Oct. 1), FHA lenders have originated $962.5 million in three-year hybrids, but only $40.5 million in five-year hybrids.
A Washington consultant with Potomac Partners said the rule change should make FHA lenders more competitive in the hybrid market. "The five-year puts them in the game," Bud Carter said.
Although the interim rule does not go into effect until April 28, Mr. Carter is telling clients that they can start taking applications for FHA 5/1 hybrids now. It takes at least 30 days to close and get the loan documents ready for endorsement. By then, the FHA should be ready to insure the loans, he said.
The FHA also insures 7/1 and 10/1 hybrids that allow an initial interest rate adjustment of 200 bp and a lifetime cap of 600 bp.
But five-year hybrids are the most popular hybrid product. For two years lenders lobbied Congress to raise the adjustment cap on the five-year and then it took HUD another 15 months to issue the interim rule.
Some observers partially blame FHA's drop in loan volume over the past several years to the lack of a viable five-year hybrid product.
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