Adjustable real estate loan activity soars

Borrowers combat affordability issues
Inman News
Adjustable-rate mortgages, known as ARMs, and interest-only products accounted for a full 63 percent of U.S. mortgage originations in the second half of 2004, according to the Mortgage Bankers Association's Single-Family Mortgage Activity Survey released Wednesday.

The survey covers mortgage activity during the third and fourth quarters of 2004. It represents about half of the mortgages originated last year.

The dollar volume of first-mortgage originations declined 9 percent from the first half to the second half of 2004, the study said. While the dollar volume of refinances fell in the second half, the dollar volume of purchase originations rose, resulting in the purchase share of originations increasing from 41 percent in the first half to 51 percent in the second half of 2004.

"Consumers shift to ARMs when long-term rates rise and when the spread between long- and short-term rates widens. This happens at the end of every refinance boom, so it's not a surprise that ARM share has risen over the last year," said Doug Duncan, MBA's chief economist and senior vice president.

Duncan said this interest cycle is unusual because the increase in ARMs has occurred with a much smaller increase in rates than in past cycles. He said one reason for this is that appreciation in house prices leading up to this ARM cycle was much stronger than in previous ones. This created affordability constraints that led a number of buyers to seek lower payments with ARMs.

The survey also found that non-prime loans increased their market share, capturing nearly one-third of the mortgage market in the third and fourth quarters of 2004.

The survey included more than 90 companies, including the top 12 loan originators and 25 of the top 30 loan originators. Based on internal market estimates, sample coverage included more than 50 percent of total market originations of first and second mortgages. This survey collected detailed information on origination of first and second mortgages – including for the first time data on hybrid ARMs, alt-A mortgages, FICO scores, LTV distributions, and piggyback and stand-alone second-home loans.

Whenever possible, comparisons were made to highlight the trends from the first half to the second half. All trends were based on data from repeater companies - companies that reported data for both the first and second halves of 2004. Survey results from the MBA study are only available to participants.