With housing stock low, home prices high, and interest rates showing no signs of coming down, many credit unions are turning to adjustable-rate mortgages to help would-be borrowers find a home. ARM loans gained a bad reputation after the 2008 housing crisis and the Great Recession, but credit union leaders insist that with the right education and a clear understanding of how the product works, adjustable-rate mortgages can be an ideal solution for would-be homeowners.
“ARM” Isn’t A 4-Letter Word
The high interest rate environment led Tucson Federal Credit Union ($749.4M, Tucson, AZ) to roll out Fixed4Five, an ARM option that offers a 5% fixed rate for the first five years. After that period, the loan adjusts on a five-year basis with increases capped at two percentage points and a five-point limit over the life of the loan. The intent, explains Ashley Kemp, vice president of lending and solutions, is to make homeownership more accessible and affordable for members.
“ARM was such a bad word for so long after 2008-2009,” Kemp says. “People didn’t want to hear about it. But our branch staff is comfortable talking through this product with members so they feel comfortable.”
That said, the credit union isn’t about to force members who aren’t comfortable with ARMS into one. Traditional fixed-rate mortgages are available for borrowers who are more comfortable going that route or in instances where it makes more sense than an adjustable option.
Approximately 1,500 miles away, Veridian Credit Union ($8.0B, Waterloo, IA) has always focused on ARMs, but the interest rate hikes of the past couple of years have made that product substantially more attractive to members, says Kara VanWert, chief lending officer.
“The mindset and the knowledge today about refinancing your house is very different from what it was in 2009 and 2010,” VanWert says. “I don’t think there’s that fear of ARMs like there used to be.”
It’s All In The Approach
Both credit unions emphasize the importance of education.
Veridian offers 5/1 and 7/1 ARMs and approaches the subject when discussing how long members expect to be in the home. If they’re only planning for five or seven years, the ARM might be the best option because they’ll have moved on before the rate resets. This is an important product at Veridian because it focuses heavily on younger borrowers, many of whom are looking for starter homes.
“Usually when you buy your first home, you don’t think you’ll be there forever,” VanWert says.
To ensure members get the most accurate information possible, Veridian directs all questions to mortgage loan officers, who likely know the product and the market better than front-line staff.
“The most common question we get is about rates — is my payment going to go up $2,000 after these first five years?” says Tucson Federal’s Kemp.
To combat those fears, the credit union goes into detail explaining the math around indexes and margins so members know how the product works. It even breaks down the worst-case scenario, which at a 5% adjustment over the life of the loan won’t double the borrower’s mortgage payment.
Discussions at both credit unions also focus on the fact that ARMs can help members afford more house than they might get with a traditional fixed rate. Veridian sweetens the deal even further by offering a 100% financing option.
Part of the education process includes helping members understand how the ARM environment is different today compared to before the housing crisis. Rates were already low back then, so expecting them to drop further once rates adjusted was a bad bet. Additionally, many of the bad actors that caused the housing crisis were employing lax underwriting criteria and putting borrowers into homes they couldn’t afford with loan structures that were destined to cause problems, including interest-only payments and no-downpayment loans. In other words, the adjustment wasn’t the problem — it was merely the straw that broke the camel’s back on loans designed to benefit lenders rather than borrowers.
But, both credit unions recognize an adjustable-rate product isn’t for everyone.
“If members are that uneasy, they shouldn’t be in an ARM,” Kemp says. “Our CFO will be the first to tell you we don’t predict rates — you never know what’s going to happen. If members are that concerned with what could happen, it’s probably better for them to be in a fixed rate.”
Rising interest rates make fixed-rate mortgages less attractive. Read “Higher Rates Bring More Non-Fixed Mortgages” for Callahan’s take on how appetites for adjustable-rate mortgages have changed in the past 20 years and what the future could hold.
The Security Is In The Structure
Associated Credit Union ($2.2B, Norcross, GA) takes a different approach. Rather than a 5/1 or a 7/1, Associated offers a 15/15 split, fixing the rate for the first 15 years of the note, making a one-time adjustment at the 15-year mark, and fixing the rate for the second half of the note at a level based on the five-year Treasury with a maximum margin of 250 basis points up or down and a maximum adjustment of 5% above the initial rate.
“We’ve seen from historical data that most members don’t stay in a mortgage for more than five to seven years, so they’ll never see that interest rate adjustment,” says Chad Evans, executive vice president of lending. “That puts stability in the member’s mind. Most consumers are homed in on a 30-year fixed for the stability, and it’s hard to talk them out of it.”
The 15-year window, he adds, helps members feel secure about the initial term — and because many don’t expect to be in the home when the rate resets, the adjustment is far less of a factor. External factors such as rising property taxes and homeowners’ insurance premiums have also made the product more attractive, Evans says.
When it comes to promoting the product, Associated’s efforts to educate local real estate agents has been instrumental in getting the word out, as has a comparison calculator on the credit union’s website that shows the difference in interest rates and how payments could change post-adjustment.
“We feel a responsibility to let them know what happens at the end of that 15 years,” Evans says. “If they do make it to the end, they need to know there’s a possibility their payment could change.”
Rising rates have made ARMs an easier sell, but the real key to success lies in listening to members and staff, the EVP emphasizes.
“There’s risk in anything we do — reputational risk, interest rate risk, ALM risk — but you have to put the customer first,” he says. “Your staff is your front line. They’re talking to members and hearing what the challenges are. If you listen to your people and try to develop products and services that satisfy the challenges they’re hearing, it goes so much better.”