Adjustable Rate Mortgages Remain a Draw

As the Federal Reserve embarked last year on what economists have predicted will be an ongoing program of interest rate hikes, Connecticut banks have since increased mortgages with adjustable rates — a major contributor to the Great Recession of 2009 when homeowners borrowed at lower, initial rates, then could not keep up with ballooning payments as interest escalated on a contractual schedule.

Adjustable rate mortgages made up 22 percent of all mortgages outstanding in Connecticut as of June, according to a Hearst Connecticut Media analysis of ARM and overall mortgage data on file with the Federal Deposit Insurance Corp. That represented a 1 percent increase over the intervening year, despite the Fed’s Open Market Committee having hiked four times since June 2017 the federal funds rate that governs the interest banks charge their own customers for mortgages and other loans.

Of some 40 banks based in Connecticut, more than half reported an increase in ARM loans outstanding, with the overall total up 5.4 percent to $6.7 billion, with year-over-year differences stark in some cases.

Fieldpoint Private Bank & Trust in Greenwich reported a 14 percent decline in ARM loans that still left it with among the larger portfolios calculated as a percentage of total mortgages outstanding, along with New Canaan-based Bankwell and Laurel Road Bank, formerly known as Darien-Rowayton Bank.

By contrast at tiny Milford Bank, ARM loans were up more than 60 percent in the past year, but remain only 15 cents on every dollar of mortgages outstanding.

Mixed results

At the nation’s biggest banks, ARM lending trends have been mixed, including those that have a significant presence in Connecticut. Bank of America and JPMorgan Chase added to their ARM totals nationally — FDIC does not detail any one bank’s figures on a state-by-state basis — while Wells Fargo and Citi saw their own percentages ebb.

At People’s United Financial, the largest mortgage lender based in Connecticut, ARM loans made up 13 percent of total mortgages as of June, a slight reduction from the year before and well below Connecticut’s overall ratio. The Bridgeport-based bank is now in the process of acquiring the parent company of Farmington Bank, where ARM loans spiked 27 percent in the past year to make up a third of its total mortgage portfolio.

In June, banking analytics firm Black Knight determined that more than 1.7 million ARM borrowers nationally have seen their monthly payments escalate $70 a month on average over the past year.

“Borrowers had been the beneficiary of downward reductions in their rates and payments following the financial crisis, but that’s no longer the case,” the Jacksonville, Fla.-based firm stated in its monthly newsletter. “While this has not led to any measurable increase in … ARM delinquencies, ARM loans are now prepaying at a 70 percent higher rate than their fixed-rate counterparts over the past 12 months.”

Another million borrowers could face payment increases when their mortgage contracts hit the next “reset” milestone if rates hold steady or increase, Black Knight determined.

‘A place for ARM’

Heading into 2007 and 2008, many homeowners accepted the risk of higher ARM interest rates on the assumption they could sell their property if their income did not keep up, which proved untenable as the housing market went dry. Like other states, Connecticut saw a wave of resulting foreclosures, peaking in 2012 at 22,000 seizures by lenders as tracked by CoreLogic.

On Tuesday, the Boston-based Warren Group reported July increases in both home sales and median prices in Connecticut, a key period representing closed transactions from purchase contracts reached in the spring months. But with home sales trending downward nationally — new Mortgage Bankers Association reported a 1.7 percent decline in new applications last week, and a drop as well in ARM filings — it is anyone’s guess whether that trend will continue on an upward trajectory.

At Stamford-based First County Bank, ARM loans were down more than 10 percent in the past year, with CEO Rey Giallongo telling Hearst Connecticut Media via email that his company has seen more people opting of late for traditional, 30-year fixed-rate mortgages.

“There’s a place for ARM, but it’s primarily a customer who is more mobile and not planning on being in a home for the long run,” Giallongo stated.

Photo by Tyler Sizemore; 203-842-2545; @casoulman