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More Consumers Choosing Adjustable-Rate Mortgages

Fixed rates still the norm, but ARMs making a comeback

July 13, 2017

By CHRIS BOSAK The Hour (Tribune News Service)



As the housing market continues its slow rebound in Connecticut, mortgage rates will continue to play a vital role in maintaining momentum.

Although up from their lows of recent years, mortgage rates remain attractive to many people with 30-year fixed loans carrying a rate between 4.1 percent and 4.3 percent. That rate is likely to inch up for the remainder of the year, experts say.

That notion was backed up Wednesday when Federal Reserve Chair Janet Yellen said in testimony to Congress that the central bank expects to keep raising a key interest rate. That rate was dropped to near zero in December 2008 to spur economic activity and was not raised until December 2015. It has since seen two additional increases.

Despite Yellen's comments Wednesday, Donald Klepper-Smith, an economist at DataCore Partners, said he expects the Fed to "err on the side of caution" and any change should be "more sideways activity with no abrupt increases or decreases."

"The interest-sensitive sectors of our economy have benefited over the years from this fiscal policy," Klepper-Smith said.

Low interest rates do not necessarily mean mortgages are easy to come by, however. Standards in granting mortgage loans have tightened considerably since the recession, which was blamed in part on subprime mortgage lending.

"It's changed a ton," said Justin Egan of Residential Mortgage Service in Fairfield. "Since the financial crisis, the industry has become a lot more responsible. Documentation to get a loan is greater than it was 10 years ago. There are parameters that weren't in place 10 years ago."


A New Norm
Still, the industry is starting to "reach equilibrium again," said Joseph Antonios, vice president and private mortgage banker at United Bank, said.

"The trend we're seeing is banks being a bit more lax in lending," Antonios said. "It made no sense at all the types of people getting loans [prior to the recession]. You never see that today."

Instead, the industry is assuming a "new norm," that Antonios considers to be a positive trend, he said.

Last week, a Fannie Mae index that tracks home purchase sentiment matched an all-time high set in February, with sellers even more bullish than buyers. Fannie polls 1,000 people monthly to produce the index, without breaking out sentiment by regions.

Fannie's chief economist Doug Duncan stated buyers are more optimistic, as well, about their ability to get a mortgage, with lenders expecting to ease credit standards in the coming months.

In its own most recent forecast in June, however, the Mortgage Bankers Association predicted loan originations nationally will drop throughout the remainder of 2017 and into 2018 before rebounding the following year.

In April, the chief financial officer of Bridgeport-based People's United Financial described as "outstanding" the quality of the company's residential mortgage portfolio in recent years, with an average FICO score of 750 for newly originated mortgages in the first quarter of 2017. People's United is scheduled to discuss next week its results for the second quarter, a key period representing the spring home-buying market.

"The overwhelming majority of business retained continues to be hybrid, adjustable-rate mortgages," said People's United Chief Financial Officer David Rosato in an April conference call.


Return of the ARM
The upward trend in mortgage rates, however slight, is stirring a renewed interest in ARMs. ARMs, or adjustable-rate mortgages, are fixed for a predetermined number of years and then are adjusted according to market conditions. The initial interest rate on an ARM is below that of a fixed rate.

"As the interest rates go up, the number of ARM loans start to go up," Egan said.

Egan said ARM loans are desirable options for homeowners who plan to live at a home for a certain number of years. The 5/1 ARM is the most common, meaning the rate is fixed for five years and then is adjusted each year beyond that. Egan also offers a 10/1 ARM.

"If you don't plan on staying in the house for very long -- say, you are moving to Florida in five years -- an ARM may be a good option," he said. "If you plan on staying for a long time, I wouldn't suggest that."

Newtown Savings Bank's Margaret Powers, chief credit officer, and Joe Bartolomeo, mortgage sales manager, said ARMs are also popular with home-buyers requiring a jumbo mortgage, or a loan that exceeds $601,450 in Fairfield County.

"ARMs allow the borrower to purchase more house, keeping their monthly payment lower; usually the loan size is $500,000 or greater," Powers said.

Powers and Bartolomeo have also seen a recent increase in refinancing into a 15-year loan from a 30-year fixed.


Help for First-Timers
Egan said another recent trend in the state is first-time home-buyers taking advantage of a Connecticut Housing Finance Authority, or CHFA, loan program. CHFA offers loans at below-market interest rates and finances close to 100 percent of the sale price. The loans are limited based on the buyer's income level and price of the home.

"It helps people who are financially responsible and have jobs, but otherwise may not be able to purchase a home," Egan said.

Powers and Bartolomeo expect rates to climb to about 4.50 percent by the end of the year.

"Rates edged higher after the jobs report (last week), but are still below what was forecasted," Bartolomeo said, adding that a variety of factors impact the rate. "Economic activity such as jobs, consumer confidence, gross domestic product and home sales are some factors. Bad economic news usually brings lower interest rates. Just follow the 10-year bond yield -- yield up, mortgage rates up; yield down, rates down."


Alexander Soule and Macaela Bennett contributed to this article.

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To see more of The Hour or to subscribe to the newspaper, go to http://www.thehour.com

Copyright (c) 2017, The Hour, Norwalk, Conn.

Distributed by Tribune News Service.


This story was distributed by TNS - Tribune News Service
 
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