AP NEWS
Related topics

Convertible ARMs a ‘Hot New Product’ for Home Buyers

January 28, 1988

NEW YORK (AP) _ When is an adjustable-rate home mortgage no longer adjustable?

When it’s converted into a mortgage with a fixed rate of interest.

The convertible adjustable-rate mortgage - known in the trade as a convertible ARM - seems to be getting more popular, as a number of home buyers anticipate a decline in interest rates in the near future.

Some government agencies are trying to make the market for it even bigger.

On Monday, the Federal Home Loan Mortgage Corp. announced a new program to buy up convertible ARMs from lending institutions and sell them to investors. The Federal National Mortgage Association has a similar program.

Those plans, which free up money for lending to other home buyers, should make lenders more open to giving out convertible ARMs.

Freddie Mac plans to buy up about $5 billion worth of convertible ARMs this year from thousands of savings and loans, mortgage bankers and commercial banks. That translates into some 70,000 mortgages, according to Freddie Mac - which calls the convertible ARM a ″hot new product.″

″We think it’s an important financing alternative for buyers,″ said Jeanne Wolfson, a spokeswoman for the agency.

The mortgages can be converted from an adjustable rate to a fixed rate at any time within the first five years. They can help first-time buyers who are having difficulty purchasing a home by lowering interest rates, Ms. Wolfson said.

Why the appeal?

Home buyers who expect interest rates to decline sometime after they make their purchase can convert to a fixed-rate mortgage to lock in the lower interest rates.

And the new convertibles are more flexible than earlier models, which allowed conversion only during the 30 days following the third, fourth or fifth-year ″anniversaries″ of the mortgage. Conversion fees are sometimes based on a percentage point of the original or outstanding balance of the mortgage, or can be a flat charge of about $250 to $500.

The expectation of some home buyers that interest rates will fall this year, which has fueled the interest in convertible ARMs, is based largely on the view that a delayed reaction from October’s stock market crash will bring an economic slowdown.

The potential homeowners, like many economists, believe the Federal Reserve will have to nudge interest rates lower to encourage investment and keep the economy rolling.

Open-market interest rates - with mortgage rates in tandem - will likely rise before falling later in the year, says John Tuccillo, chief economist for the National Association of Realtors in Washington.

He expects rates on 30-year, fixed-rate mortgages to average 10.75 percent to 11 percent in the first half of the year, then fall to around 10.5 percent in the second half. That compares with around 11.5 percent before the Oct. 19 market collapse.

″I think the convertible mortgage would become more popular in this interest-rate scenario,″ Tuccillo said.

Robert Van Order, Freddie Mac’s chief economist, believes 30-year fixed- rate mortgages could fall as low as 10 percent in the second half.

Besides the economic factors, some observers see political pressure on the Fed to push interest rates lower as the November elections approach.

But some economists reject the notion that interest rates are poised to decline later in the year.

″The market will take them higher,″ predicts David Hale, chief economist for investment firm Kemper Financial Services Inc. in Chicago. ″The latest batch of economic data should help to dispel concerns about a recession materializing because of sluggish consumer spending.″

End Adv PMs Thurs Jan. 28

AP RADIO
Update hourly