One of the interesting details about the weeklymortgage data released by the Mortgage Bankers Associaton is the breakdown of the data into different types of mortgage activity. For example, mortgage application activity was up overall this week, but it was led by refinance activity. This suggests that most people taking advantage of low interest rates are existing homeowners, rather than people moving into the housing market.
Another noteworthy little nugget was that adjustable rate mortgages (ARMs) represented just 6.5% of mortgage applications last week. That’s quite a comedown; just three years ago, ARMs represented 26.8% of mortgage activity.
Of course, ARMs (especially the more exotic forms, involving balloon payments) have been featured prominently in stories about mortgage problems over the past year or so. In some cases, people used ARMs to get into houses they couldn’t really afford with low initial payments, and then defaulted when payments adjusted upward.
So, does the low proportion of ARMs really mean people have gotten the message about that type of financing — or is it simply a function of today’s low interest rates? After all, ARMs are partly a hedge against mortgage rates falling, so why do that when rates are near their all-time lows?
Even if the low proportion of ARMs is a function of low interest rates rather than any permanent lesson, it still represents a positive development — it’s simply rational economic behavior under the circumstances.
And what about that remaining 6.5% still applying for ARMs? There’s not necessarily anything wrong with that. ARMs still have a legitimate place, for people under special conditions who know what they are doing. That portion of the mortgage-buying population is probably much closer to today’s 6.5% figure than the 26.8% who were applying for ARMs three years ago.
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