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ARMS Vs. FRMS—Which Loan Comes Out on Top?

Loan, file, loan fileCoreLogic’s Archana Pradhan released a blog post Wednesday titled “Comparing Performance of Adjustable-Rate Mortgages and Fixed-Rate Mortgages” which cited data collected from CoreLogic’s Loan Performance Insights Report released in June 2017. Based on that data, the rate of serious delinquency was 1.9 percent, dropping 0.6 percent in the overall rate compared to the same time last year. Regarding adjustable-rate mortgages (ARMs) and fixed-rate mortgages (FRMs), the data shows a significant difference in delinquency rate.

ARMs landed at a 5.2 percent delinquency rate while FRMs were at 1.8 percent, a three-fold difference. The rates for both ARMs and FRMs are near a 10-year low and both experienced a drop compared to June 2016. According to CoreLogic, loans originating between 2003 and 2008 make up the bulk of the delinquency rate.

Over 90 percent of ARMs considered seriously delinquent originated between 2003 and 2009, compared to the 3 percent that were delinquent between 2010 and 2017. The correlation also exists with FRMs in the same time frame, with 61 percent and 28 percent of delinquent loans originating from 2003-2009 and 2010-2017 respectively. CoreLogic notes the delinquency rate is largely influenced by loans made prior to 2010, so using the rate to compare how newer ARMs’ perform relative to FRMs may provide misleading results.

The report also mentions notable trends among serious delinquency rates of conventional loans by vintage. For example, as ARMs and FRMs began to enter 2009, their performance improved, which Pradhan attributes to tightened underwriting standards after the economic recovery in mid-2009. Loans also originating in 2016 performed the best with the lowest 15-month delinquency in 10 years.

Delinquency rate for ARMs was higher than the rate for FRMs before 2010, but as the option for ARMs and interest-only ARMs succeeded, the pattern reversed. CoreLogic attributes this to the Ability-to-Repay and Qualified Mortgage standards eliminating risky products.

 

The full report and vintages are available here.   

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