Lenders share their game plans for a difficult stretch

Adjustable rate mortgages, another option for stemming rising rates, accounted for an 8% share of all mortgage applications for the weekly period ending Nov. 18. First-time homebuyers are also attracted to the products which can increase their purchasing power. ARMs aren’t immune to rate hikes but as of last week the average of the 5/1 ARM was 5.56%, a significant step down from 30-year fixed rates approaching 7%.

Lenders think borrowers won’t stray from the products, but aren’t as keen on the ARM advantage today. Tomo Networks, a digital lender formed in 2020, is going to offer an ARM product in the near future, co-founder and CEO Greg Schwartz said, but pricing advantages and customer confusion prompt some hesitancy.

“Until a few weeks ago, the advantage to an ARM was like an eighth of a point,” he said. “So it wasn’t enough for most folks to take on what is a more complicated and sometimes intimidating product.”

The advantage of ARMs can be determined by the 10-year Treasury yield, where an inversion, in which the yield is lower than shorter-term instruments, makes the product uncompetitive against conventional mortgages assessed off the 30-year Treasury yield, experts said. Last week the 10-year was 50 basis points below the 2-year bond, S&P Global Market Intelligence reported, an inversion which is also an indicator of a looming recession.

Shekhar of InstaMortgage said the firm’s clients continue to ask for ARMs in pursuit of any rate relief, no matter how short-term. Lenders said the products also give borrowers the option to pursue a refinance in the near-future should rates recede. 

“Short term projections are always hard to make,” he said. “But to say, will the rates in the next 5 years be lower than 7% at least once? Chances are yes, of course no one knows the future.”

Independent mortgage banks also aren’t going to offer ARMs as much as depositories, which have access to cheap capital to price the products differently, said Shoemaker.

“From a portfolio standpoint, it’s a really, really attractive thing for them, they can get a decent return and they’re also using it as a new customer acquisition strategy on the depository side,” he said.