Home lending has reached a new low. Introductory rates akin to credit card and automobile lending deals have surfaced in the mortgage market disguised as flexible ARM programs.
Participating companies are offering low initial monthly payments with up to four different payment options; interest only, minimum payment, and P & I amortized at the 15- or 30-year term.
IndyMac Bancorp calls it the FlexPay loan with a start rate of 1%; at, at WaMu it's the Option ARM and at Flagstar Bank it is called the Option Power ARM, with rates starting at 1.25% for the first 90 days.
Despite its given name by the lender, the short-term ARM programs follow the same Monthly Treasury Average index or the Cost of Funds Index, or COFI, and follow the same general guidelines.
At Countrywide, the PayOption ARM accounted for more than one-third of mortgage loan volume during the fourth quarter of 2004. ARMs represented 68 percent of Countrywide's home loan volume, of which 40% ($19 billion) were short-term.
National City Corp. executive Todd Householder said in California, short-term ARMs account for as much as 20% of all mortgage volume, however National City has yet to begin offering the product. "We have not yet implemented the pay option ARM," Householder explained in an email to MortgageDaily.com. "Our plans are to roll it out some time in the second quarter."
Washington Mutual has offered the Option ARM for nearly twenty years, said company spokeswoman Sara Gaugl.
Gaugl said the Option ARM rate is based on the 12-Month Treasury Average or COFI value, plus a margin. She added that because these indices have historically been very stable and slower moving than other ARM indices, "it creates slow moving, easy to handle adjustments."
Gaugl said that WaMu does not breakdown Option ARM volume from the total ARM volume; however, the company reported fourth quarter ARM loan volume of 68%, representing a 20% increase from 2003s fourth quarter ARM volume of 48%.