Increased ARM demand prompts lenders, servicers to act

Rising interest rates are pushing borrowers to adjustable-rate mortgages, prompting lenders to prepare their offerings and servicers to alert impacted borrowers.

ARMs accounted for more than 11% of rate locks, their largest share in nearly four years and up more than three percentage points over the past three months, the Intercontinental Exchange's latest mortgage monitor report found.

"As you experience different rate cycles, different products come into vogue and into demand, and ARM loans are just one of those," Andy Walden, head of mortgage and housing market research at ICE, told National Mortgage News. "The focus for lenders is to make sure that you're up to speed on where the market is drifting from a rate perspective, what that means for borrower demand, and then putting the right product in the right place at the right time."

Certain borrowers will also see significant payment increases as they enter their initial adjustment period, triggering servicers to act. 

About 180,000 ARMs are scheduled for their first reset next year, up from roughly 150,000 in 2026, with another 155,000 scheduled for 2028. Among next year's resets, about 74,000 7-year ARMs originated in 2020 are expected to see the largest median payment increase at $1,066 per month, or 36%, reflecting their lower initial rates, higher balances and higher periodic rate caps, the report showed.

"Being proactive in reaching out to those borrowers that have upcoming shocks and letting them know they're coming helps those borrowers financially prepare and improves the outcome for those borrowers as well," Walden said.

The increase in interest came as the 30-year fixed-rate mortgage reached 7.03% on Sept. 24 before surging to 7.28% a week later, according to Freddie Mac.

"ARMs are becoming more attractive to borrowers looking for relief from today's higher fixed rates, but the overall market exposure to adjustable payments remains relatively limited," Walden said in a press release Monday. 

While increased demand in recent years has grown the number of outstanding ARM loans to 3.1 million, its highest level in more than five years, the majority of those loans remain in their initial fixed periods. Just over a million active ARM loans have reached their first reset and operate as adjustable-rate loans. 

More than 90% of ARMs originated since 2022 remain in their introductory fixed-rate periods, while most post-reset ARMs were originated more than 10 years ago and already experienced rate adjustments during the 2022 Federal Reserve tightening cycle, according to the report.

The Fed's latest rate hike is expected to have a modest and gradual impact on most existing ARM borrowers. Assuming a full 25-basis-point pass-through, the median affected borrower would see their monthly payment increase by about $14. More recently originated loans, which tend to carry higher balances, could see a higher median increase of roughly $53 per month, the report found.