A new Department of Housing and Urban Development rule that removes limitations on the number of Federal Housing Administration-insured adjustable-rate mortgages that individual lenders can issue should significantly boost their availability to home buyers.
The rule, which took effect Oct. 1, sets a first-come, first-serve approach for allocating FHA adjustable-rate mortgages to lenders. Under the old regulations, HUD gave each lender authority to issue only 25 of these mortgages at a time. Now lenders can get as many as they want.
The move comes at a time when the popularity of adjustable-rate mortgages has risen in response to higher interest rates, particularly for fixed-rate loans. Borrowers typically can qualify for higher-priced houses with adjustable-rate mortgages because lenders consider only the borrower's ability to meet the first year's monthly payments, which tend to be much lower than those in subsequent years.
But the quota had discouraged lenders from using these loans, which protect borrowers against larger annual interest-rate increases and sets a lower lifetime rate cap than conventional adjustable-rate mortgages. FHA adjustable mortgage rates can only be raised 1 percentage point a year and are limited to a 5 percentage point increase over the life of the loan.
In contrast, many conventional adjustable mortgages have increases of 2 percentage points a year and a lifetime cap of 6 percentage points. As with fixed-rate FHA loans, borrowers can make as little as a $500 down payment. Conventional adjustables generally require a down payment of 5 or 10 percent of the purchase price.
"The old system was inefficient and led to disparity," said Bill Glavin, a HUD spokesman.
Dick Manuel, chairman of the local Mortgage Banker Association of America's FHA subcommittee, said lenders avoided issuing their quota of FHA adjustable-rate mortgages because they could not get enough of them to make them attractive investments for buyers in secondary mortgage markets. David Hershman, vice president of Wye Mortgage Co., said lenders typically need a minimum of $1 million a month of a particular type of mortgage to be able to pool them to sell to investors.
Those lenders who did offer FHA adjustable mortgages typically spent money and time finding other lenders with ARMS so they could consolidate their portfolios and sell them on secondary markets, said Rich Becker, executive vice president of A.E. Lanvoigt Inc., a mortgage banking firm. Manuel said these companies also had problems getting additional authority to issue FHA adjustable mortgages because other lenders who didn't use their allocations "just sat on them."
Hershman noted that unless lenders can sell their mortgages to investors, they can't replenish their money to make more loans. "If we can't sell FHA adjustable-rate mortgages, the money we have would be used up in a short while," he said.
In fiscal year 1987, HUD processed 13,000 FHA adjustable mortgages out of an authorized limit of 79,000, according to HUD spokesman Glavin. But he said the agency expects to process "significantly more" because the new rule should allow lenders to write as many FHA adjustable mortgages as they need, up to a statutory limit of 100,000 this fiscal year. That will enable them to put together larger packages of these loans, which will make them easier to sell in secondary markets.