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Expert: Real estate decline fears ‘overblown' for 2005

Apr 28, 2005

HUD issues interim rule for ARM eligibility mortgagepress.comHUD-insured, adjustable-rate mortgage, interest rates The Federal Housing Administration is making available a new HUD-insurable, adjustable rate mortgage (ARM). The rule allows the HUD secretary to insure five-year hybrid ARMs with interest rates adjustable by up to two percentage points annually. In addition, the lifetime cap on annual interest rate adjustments for five-year ARMs is increased to six percentage points. The FHA hopes that these changes will make five-year ARMs more attractive to consumers because lenders will be able to offer lower initial interest rates than those offered for conventional 30-year fixed-rate mortgages. Section 251 of the National Housing Act limits the amount of annual interest rate adjustments on ARMs insured by the FHA depending upon the length of the initial fixed interest rate term. Currently, five-year hybrid ARMs have a one percent limitation for the annual interest rate adjustment. Mortgage lenders have expressed to HUD that a one percent cap does not provide lenders with sufficient interest rate flexibility to offer five-year ARMs at an interest rate below the traditional 30-year fixed rate mortgage. As a result, five-year ARMs are less attractive to both lenders and borrowers because the appeal of ARM loans is based on their lower initial interest rate. The one percent limitation also weakens HUD's ability to offer mortgage insurance for different types of ARM loans with initial interest rates lower than the interest rates for conventional 30-year fixed-rate mortgages. By increasing the percentage limitation to two percentage points, lenders will have more flexibility when offering ARM loans and consumers will be able to receive initial interest rates lower than those offered for 30-year fixed-rate mortgages. The lifetime cap on annual interest rate adjustments for five-year ARMs was increased from five to six percent. For more information, visit
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