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VOL. 131 | NO. 145 | Thursday, July 21, 2016

Adjustable-Rate Loans See Resurgence

By Andy Meek

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A loan product that loomed large during the financial crisis of 2007-08 is making something of a return to the local mortgage lending landscape, new data show.

The number of conventional adjustable-rate loans made to Shelby County borrowers so far this year has approached levels not seen since the housing bust, according to figures from real estate information company Chandler Reports, www.chandlerreports.com. Through the first half of 2016, 114 of those so-called ARMs have been recorded at the time of sale, up 2,750 percent from the first half of 2015.

2015 saw 47 of those loans recorded at the time of sale for the entire year.

If this year’s activity stays on track, 2016 could see the most conventional ARMs filed at the time of sale since 2008, when there were 187. The yearly totals have only reached double-digits since then.

Sam Goff, vice president of Independent Bank’s mortgage division, said while he hasn’t handled an ARM in years, in the last month he’s had three different inquiries about them – “one that’s still sitting on my desk.”

“All of the adjustable-rate mortgage people I’m talking to are for refinances,” Goff said. “I’ve had a couple people say they’d look at one if it made sense. And my first question to them is, ‘How long do you plan on being in the house?’ Most of them have said, ‘Well, this is probably going to be forever or 10 to 15 years.’ And in that case I steer them away.”

ARMs represent something of a gamble, especially for the borrower. Rates on the loans can rise sometimes substantially after a few years, so borrowers might be hoping they can sell their home and move on before the upward adjustment kicks in.

The loans were popular during the housing bust, when banks arguably went too far in extending loan products – including riskier loans – to the widest number of borrowers. The ARMs then added fuel to the fire when the economic slump hit, with monthly notes climbing at the same time home values collapsed.

For context of what that looked like in Shelby County, according to the Chandler Reports numbers, while there have been 114 such ARMs so far this year, 2007 saw more than 1,000.

The total in 2006 approached 3,600.

That disparity between the amounts then and now is one reason lenders like Goff and Triumph Mortgage president Travis Chapman say things are different today. Indeed, the number of ARMs filed at the time of sale so far this year represents only 2 percent of all loans filed.

Goff said the sense he gets from borrowers is that “everybody, including people wanting to refinance, is looking for the lowest monthly note they can get.”

Chapman, who said he personally has an adjustable-rate mortgage, said from what he’s seen at Triumph – where these products represent “a small fraction of our business” – the borrowers who are interested in them tend to already be interested in them when they first call.

“I think a lot of our lenders have done a good job even in years past when some of the subprime loans were available,” Chapman said. “Traditionally, you’re going to always offer a fixed rate. And when someone wants an ARM, it’s because they’ve had an ARM before or there’s a particular situation where they’re comfortable with that. Most borrowers, when we do an ARM, it’s because they’ve been requested – not because the loan officer’s trying to use it as a qualification tool to maybe squeeze the borrower in on a teaser-type rate like some of the supreme issues in the past.”

Nevertheless, the increase in ARMs as part of the overall mix of loans made in Shelby County has jumped considerably – and it doesn’t appear to be an increase tied to natural growth in the overall number of mortgages made.

In 2013, for example, such ARMs represented only 0.3 percent of loans at the time of sale in Shelby County. In 2014, that grew slightly, to 0.7 percent.

By this time last year, they only represented 0.1 percent of the overall mix – compared to 2 percent in the first half of 2016.

Another difference between the financial crisis and now – it appears that the newer loans are targeting Shelby County borrowers with better credit, as the average mortgage amount on the loans through the first half of 2016 is $259,897, compared to $140,603 in 2004, the Chandler Reports data show.

Chandler Reports is a division of The Daily News Publishing Co.

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PROPERTY SALES 70 70 3,959
MORTGAGES 95 95 4,771
BUILDING PERMITS 161 161 8,422
BANKRUPTCIES 48 48 3,072

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