The size of the average fixed-rate mortgage last week nationally was $280,900. The size of the average adjustable-rate mortgage was $688,400 â two and a half times as big.
That data point, courtesy of the Mortgage Bankers Association, is a reminder â perhaps an uncomfortable one â that the mortgage industry must still offer products that make it artificially affordable to get people in the door, with the intention of refinancing later.
Thatâs âuncomfortableâ because in many ways, itâs reminiscent of the housing bubble a decade ago. Progressives blame Wall Street, while conservatives blame lower-income people and the government policies that helped get them into homes they couldnât afford. And analysts of all persuasions blame the mortgage industry for connecting people to increasingly exotic loans that would enable them to afford homeownership, including adjustable-rate mortgages.
The ARM phenomenon of the early 2000s was insidious: borrowers received an initial teaser rate that they could afford for several years, with the expectation that before it reset, they would refinance â and possibly repeat that process again and again. That approach not only made homeowners of many people who probably shouldnât have been, it also assured a steady stream of fees for lenders.
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The lending landscape of 2019 looks vastly different, of course.
The gulf between the two averages is a bit wider now than itâs been in recent years, as shown in the chart. It also surged just before the housing downturn, when prices peaked.
Mortgage experts arenât really surprised. ARMs have always carried larger balances, the MBAâs chief economist, Mike Fratantoni, pointed out, in order to help those struggling to afford costly homes, âbut there are times when we see them move even higher.â
But even though itâs not a surprise, the reasons behind the trend can feel unsettling. âI think there is still a desire to use the product which is going to get you into the home and then maybe there may be an opportunity to refinance into a fixed-rate mortgage later,â Fratantoni told MarketWatch.
Fratantoni also notes that higher-income borrowers may be more tolerant of a little interest-rate risk, whereas those in the lower tiers of the market and first-time buyers generally âvalue the stable payment that a fixed-rate mortgage provides.â
Still, even if ARM borrowers are people with greater means, they are gambling on a riskier product that doesnât offer that much more of an advantage over fixed-rate mortgages. In the most recent week, according to Freddie Mac, the average 5/1 ARM was 3.96%, while the average 30-year fixed-rate mortgage was 4.46%.
A 5/1 ARM offers an introductory rate for five years before resetting.
Also see: Americans are still shunning adjustable-rate mortgages 10 years after the crisis
Karan Kaul, an Urban Institute researcher, called the recent explosion in the size of ARMs âironicâ for their similarities to the bubble era, but said that things are very different now. Perhaps most important, Kaul thinks, is the contrast between the fundamentals of the two markets. A decade ago, speculation and greed drove up prices, whereas now, in a supply-starved market, âdemandâ might be just as easily characterized as âneedâ for housing, of any kind.
Another important consideration is that ARMs now make up a single-digit percentage of all mortgages, whereas during the bubble years they were about 35% of the total. Itâs worth noting that ARMs account for 18% of all mortgages in California, a confirmation that in the priciest corners of a pricey market, people must be as strategic as possible.
And Fratantoni stresses that the ARMs of today arenât those of a decade ago. Underwriters must now make sure borrowers can afford any monthly payment during the life of the loan, even if the rate resets, because of changes introduced by the Dodd-Frank bank reform law.
Itâs also worth noting that the mortgage industry has a similar strategy for helping borrowers on the opposite end of the market get in the door with the intention of refinancing a few years later: the use of Federal Housing Administration loans.
Related: House prices have surged, and so will the governmentâs mortgage obligations