They also combat Downturns and Instill Greater Member Trust
By Andrew Duncan, senior vice president of mortgage technology and compliance – as posted in the Winter 2021 edition of ACUMAs Pipeline Magazine. ACUMA Pipeline – Winter 2021 – ACUMA
Until the pandemic hit, adjustable rate mortgages (ARMs) had been working their way back into the mainstream despite the bad rap they earned during the housing crisis. Ellie Mae reports show the number of mortgages with adjustable rates increased from 5.5 percent of all new originations in January 2018 to 8.6 percent in January 2019.
Leading up to the 2008 crisis, lenders originated an increasing number of ARMs with initial adjustments after just one year, or within the first couple of years. This quick adjustment frequency, combined with substantial rate increases at each adjustment, led to significantly higher and unsustainable mortgage payments in a short period of time. As a result, many ARM borrowers defaulted.
Another problem with ARMs originated before the housing bubble burst was the prepayment penalty, which discouraged borrowers from refinancing – if they even had enough equity to do so, since many lenders approved ARMs for purchase transactions in those days with no down payment required.
Safeguards built into today’s ARMs make them less risky. Lenders now properly qualify borrowers based on how much future payments will be after the rate adjusts, instead of only the initial lower payment amount – a common practice before the subprime mortgage market collapsed. Modern-day ARMs also limit how much a mortgage can adjust, and include caps that prevent the interest rate and payments from rising too quickly.
With mortgage rates at historic lows, borrowers are more likely to choose fixed-rate mortgages than ARMs. But when interest rates go up, ARMs will regain popularity as an attractive option to borrowers – especially members who do not expect to be in their homes for a decade or longer.
Credit unions that offer ARMs diversify their mortgage options and meet the needs of different kinds of borrowers. They also gain competitive advantages that allow them to better serve members and create another source of new loans.
By taking advantage of a lower initial rate, borrowers whose long-term intentions align with ARM features can save money and more quickly pay down their obligations, creating future wealth and borrowing potential. In turn, credit unions benefit by producing a true widget in the world of loan originations – a risk-friendly asset that can be held in portfolio (if properly underwritten) and sold to turn capital as necessary.
As the economy normalizes, most credit unions – which are now experiencing a pandemic-induced mortgage and refi boom – expect volume decreases. ARMs can help combat such inevitable downturns in business.
They can also, however, present unique challenges for credit unions, whose core systems often cannot adequately originate or service the loans. Key compliance challenges include unique early disclosures, calculations in the origination process, as well as adjustment notices and related considerations in loan servicing. The impending discontinuation of LIBOR also has important implications for new originations and necessitates comprehensive risk assessments in the servicing of impacted legacy ARMs.
The advantages of properly offering ARMs, however, far outweigh the hurdles credit unions must clear to do so. Solutions include a seamless, white-label partnership with the right credit union service organization that can manage the entire mortgage operation behind the scenes. Or, credit unions can take on the task themselves by upgrading technology, searching for a secondary market outlet and training staff to ensure salability.
Whatever route they take, credit unions that expand their mortgage lending programs also ultimately build greater member trust and satisfaction. Offering a comprehensive selection of products helps to ensure they can match diverse borrowers with the mortgages that best suit their varied needs.