In the early 1980s, the thrift industry was dealing with an asset-liability duration mismatch that threatened their financial stability. So ARM products entered the scene in 1982 as part of the Garn-St. Germain Act. That law included the Alternative Mortgage Transaction Parity Act, which preempted state laws that permitted only FRMs to be originated.
From there, thrifts started originating ARMs to keep on their balance sheets to address the mismatch, and that continues through today.
As a result, while nonbanks may offer ARMs, Salahuddin expected much of the action cited in the LendingTree survey came from banks because they can price them differently. LendingTree does not keep data on who makes the offer, a company spokesperson said.
This was confirmed by another nonbank lender, which said it and anecdotally other mortgage bankers were producing just a single digit share of ARMs.
Meanwhile, some depositories are bingeing on ARMs
“Last quarter we saw a shift from fixed to ARMs with over 50% of our production being intermediate ARMs,” said Ellen Steinfeld, executive vice president and head of consumer lending for Berkshire Bank
At Navy Federal Credit Union, ARM applications are up 55% from a year ago, but that number is skewed downward because half of its volume comes from Veterans Affairs-guaranteed mortgages, which are only fixed rate products, said Kevin Parker, vice president of field mortgage originations.
Given the affordability issues pressuring the housing market, an ARM might be the only choice for some borrowers, they might not want an ARM, he continued.
“A lot of times it also comes down to those individual situations of the borrower in terms of if they plan on being at home for a long period of time or not,” Parker said. If the borrower definitively plans on moving within the fixed rate period, they will end up ahead with hybrid ARMs versus a normal FRM.
In terms of credit quality, Parker noted that Navy Federal has some of the industry’s lowest default rates, and if anything, “we actually are trying to find ways that we can be more aggressive in the underwriting box.”
Navy Federal’s customer demographics match the profile of a typical depository, since its charter allows it not only to have membership from active