Looking at hybrid ARMs
In the meantime, while rates remain above that magic number, Hagen said there has been an opportunity with hybrid adjustable-rate mortgages (ARMs) to get a lower rate in the meantime, while banking on rates to drop before the first adjustment.
“The other trend that we’re looking at is hybrid ARMs,” he said. “The vast majority of loans that are originated are fixed rate, but we see more originators doing hybrid ARMs right now, because of everything we’re talking about, like the long end of the curve is still relatively high. The Fed is bringing down short-end rates. So there’s a compelling opportunity and a rational case for borrowers to do a hybrid ARM.”
Hagen believes the only thing that has slowed the use of hybrid ARMs is a memory of some of the loan types used before the 2008 housing crash. He said memories of that time have caused some to hesitate, but he said that was a different situation.
“We think the sticking point is the fact that in the last crisis, there was a misunderstanding,” Hagen said. “I think that is the best way to say it, around some of the innovative mortgage products that existed in the last financial crisis. And so getting folks to buy back into the ARM ideas could be a little challenging, but financially, from a math standpoint, it is an affordability product.
“For all these folks who took out a fixed rate mortgage at 6.5% or 7% over these last few years, that is an opportunity for them to refi into a 5/1 or 7/1 ARM.”