FHA ARMs Here Today, Gone Tomorrow

by Peter G. Miller
September 29th, 2010

You can get an FHA adjustable-rate mortgage with no problem. Indeed, given a lower start rate it might even be easier to get than a fixed-rate FHA loan product. That said, FHA ARMs are going the way of the dodo.

To get some sense of what’s happening consider BB&T bank, a major lender based in Winston-Salem, NC. Founded in 1872, BB&T says it was among the 10 largest financial-holding companies in the nation with $165.8 billion in assets as of Dec. 31, 2009.

You don’t hear to much about BB&T in terms of the mortgage crisis because this is a bank which acts differently. It has never offered toxic loans and it refuses to finance developers who have acquired private land through public condemnation — something now allowed under the infamous Kelo decision.

We will not, said BB&T, “lend to commercial developers that plan to build condominiums, shopping malls and other private projects on land taken from private citizens by government entities using eminent domain.”

Other lenders should be so bright.

Now BB&T is again doing something different: Company spokesman David R. White tells us that “we consistently evaluate our product line and make adjustments based on clients’ needs. In this evaluation process we found the FHA and VA adjustable rate mortgage product to be a very low volume product and have taken it off our list of offerings.”

Given that the folks at BB&T have a great track record, the decision to dump FHA ARMs is something other lenders might copy.

The idea that FHA ARMs are a low volume product makes absolute sense. Why would anyone want an ARM in today’s market?

Last week, for example, Freddie Mac reported that you could get a 30-year fixed-rate mortgage at 4.37 percent. At the same time, the 5-year Treasury-indexed ARM had a start rate of 3.54 percent while the 1-year Treasury ARM began at 3.40 percent.

So, sure, loan rates at 3.54 percent and below are less than 4.37 percent. But that’s not the point. With a fixed-rate loan the rate is locked in for the life of the mortgage. With an ARM everything is a risk once the start period ends.

You can’t help but think that passage of the newly-minted Wall Street Reform Act may also impact ARM availability. The new rules require six-month’s notice under section 1418 before an ARM start rate can be re-cast. There are also new and complex rules regarding how borrowers must be qualified when financing with an adjustable-rate product.

So far in fiscal 2010 ARMs equal just 2.7% of all FHA mortgage originations and you can easily see how other lenders will pick up on the BB&T policy. After all, why offer a loan which is not attracting much public interest, creates additional risk, and produces a bunch of complications when at the same time the dull, tame, sensible FHA fixed-rate loan is readily available?

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