Adjustable rate mortgage production is flourishing

Lenders still struggling with a dearth of mortgage demand are finding business in a product attractive to borrowers in a high-rate environment.

Adjustable-rate mortgages accounted for 18.6% of conventional single-family mortgage dollar volume in April, according to a new CoreLogic analysis. That production quadrupled the ARM volume in January 2021, when it accounted for just 4% of volume amid record-low rates.

The common 5/1 ARM touts a rate of 6.09% as of late June, according to the Mortgage Bankers Association. It's risen 152 basis points in the last 12 months, but still trails elevated rates for 30-year fixed-rate loans. 

Among all current borrower activity, ARMs make a fraction of volume, accounting for 6.5% of applications last week, according to the MBA. However, homebuyers are turning to ARMs for more expensive purchases, with 45% of dollar volume of mortgages over $1 million in April coming from ARMs, CoreLogic found. 

As loan amounts shrink, so does interest in ARMs; they made up around 17% of mortgages between $400,000 to $1 million in April, according to CoreLogic. The share still trumps the single-digit share of ARMs for mid-and-high priced loans last April as rates began to climb. 

Borrowers use ARMs for low-priced mortgages at an even lower rate for loans between $200,001 to $400,000, with just 10% of those loans being ARMs, the analysis found. 

Adjustable rate products were a staple of the pre-Great Recession housing market but nosedived afterward, from a 45% share of mortgages in 2005 to just 2% in mid-2009, according to CoreLogic. Rules around documentation in lending have shored up the product and they've since touted stronger underwriting credentials. 

The share of ARMs among all origination activity has fluctuated between 8% and 18% in the past decade, according of CoreLogic. Lenders cite the mortgages as a dependable option when rates are climbing. The Federal Reserve recently paused its interest rate hikes, while the MBA predicts mortgage rates to end the year around 5.8%.

"It's important to note that there is no guarantee that mortgage rates will drop in the future, presenting an inherent interest risk that ARMs may lead to increased monthly payments," said Archana Pradhan, principal and economist at CoreLogic's Office of the Chief Economist.