New York’s new call to ARMs

When the subprime mortgage crisis hit, adjustable-rate mortgages morphed from a widely popular loan option to a widely derided culprit in the residential real estate meltdown.

However, now these variable loans, known as ARMs, are making a major comeback in New York City. Since June, they have spiked to 20 percent of the business at Equity Now, a Manhattan-based direct mortgage lender, from zero throughout 2008 and the beginning of this year.

Brokers at a range of firms making new loans say all the action is in ARMs. For example, they have jumped to 60 percent of new loans processed at Apple Mortgage Corp. this year, compared to 40 percent a year earlier.

The reason for this renewed call to ARMs is simple: In many cases they offer lower interest rates than fixed-term loans do.

Earlier this year, when interest rates for fixed-term mortgages were at historic lows, ARMs held little attraction, but that shifted in the spring when fixed-term rates rose above 5 percent.

“At the beginning of this year, with the 30-year-fixed so low, the feeling was, ‘ARMs can only go up,'” said Guy Cecala, CEO and publisher of Inside Mortgage Finance Publications, a Maryland-based publisher of newsletters and research. “That sentiment changed with rates already up to 5.25 [percent] on a 30-year fixed loan. If you want to get close to 5 percent, you have to go to an ARM.”

The 2009 ARM activity centers on so-called “hybrid ARMs,” loans where the interest rates are fixed for initial terms of 5-, 7- or 10-year terms, and then float thereafter.

Mortgage brokers and experts are quick to draw a sharp distinction between these loans, which had been typical ARMs issued before the housing boom, and the notorious payment-option ARMs that proliferated a few years ago. The latter loans allowed a mortgagee to pay only interest, or even a minimum payment of less than the monthly interest on the loan.

Such low payments meant many borrowers rapidly ended up owing more than their loan was worth — a problem that came to epitomize the dangers of extravagant lending to buyers with low credit ratings, who may not have fully understood the complex terms of their loans.

“I don’t think five-year adjustables can be lumped in with option ARMs,” said Michael Moskowitz, president of Equity Now. “Option ARMs are a whole different animal.”

The profile of New York City borrowers who pick up ARMs today reflects a more sophisticated buyer with a stronger credit profile, brokers insist.

Lenders want evidence of solid income, day in, day out, rather than an anticipated bonus bump once a year. Credit scores must be at least 700, according to mortgage brokers at Guardhill Financial Corp. and Everest Equity Company. Also, instead of six months of cash reserves being shown by borrowers, lenders are now seeking cash reserves of up to 24 months or 25 percent of the loan’s value, depending on the size of the loan, said Guardhill’s Julie Teitel, senior loan officer at the Manhattan-based mortgage banker.

“An interest-only three-year ARM — for people to get qualified for that type of ARM, that’s a thing of the past,” said Teitel.

A foreign national who recently bought a New York apartment chose an ARM for the low rate, and because he expects to resell the property quickly. A client of real estate law firm Rosabianca & Associates, the buyer preferred to build up equity by owning a place in New York rather than renting, said Luigi Rosabianca, the firm’s principal attorney. The buyer opted for an ARM since he plans to unload the apartment once his two-year assignment in New York is up.

“I see a lot of people saying, ‘This is a quick fix, I’m going to be in and out of the market,'” said Rosabianca.

The average mortgage in America typically does not last longer than seven years. But borrowers who take out ARMs banking on refinancing or paying off their loan before it resets may find the Great Recession has recast the rules.

While these buyers expect to avoid their loan’s later structural resets to far larger monthly payments, statistics on ARMs and foreclosures paint a sobering picture of risk.

In the first quarter of 2009, prime ARMs accounted for 23.8 percent of foreclosures nationwide, while subprime ARMs accounted for 26.6 percent, according to the Mortgage Bankers Association.

Inherent in ARMs is a speculative risk — a bet not just on the direction interest rates will move, but also on the borrower’s ability to resell a property.

“I think we’ve learned over the last few years that you should never count on that happening — that’s what subprime borrowers were told, too, that they could either move or just refinance,” said Cecala of Inside Mortgage Finance Publications. “We’ve seen in the current recession it’s not as easy to move and people are moving less, living in their houses longer, not by choice but by necessity.”