Rate Rise Pushing Consumers toward ARMs

Adjustable-rate mortgages and interest-only products accounted for 63% of home loan originations in the second half of last year, according to data compiled by the Mortgage Bankers Association.

Origination volume in the second half of 2004 was about evenly divided between home purchase and refinance lending, with home purchase loans accounting for 51% of the total.

MBA chief economist Doug Duncan said it's not a surprise that ARM volume increased as long-term interest rates edged up in 2004 and refinancing declined.

"This interest rate cycle is unusual in that the increase in ARMs has occurred with a much smaller increase in rates than in past cycles. One reason is that house price appreciation leading up to this ARM cycle was much stronger than in previous ones, creating affordability constraints that led a number of buyers to seek lower payments with ARMs," he said in a press release.

ARM originations were split almost evenly between traditional, one-year ARMs (53%) and hybrid ARMs (47%).

In addition, the MBA survey found that the alternative-A and nonprime credit-quality markets accounted for a growing share of the mortgage market, capturing nearly one-third of total volume in the third and fourth quarters of last year.

For first mortgage originations, the average loan-to-value ratio was 76% and the average borrower FICO score was 683, the MBA said.

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