New York Mortgage Co. expects home-loan rates to drop in coming years, so it has armed its brokers in Warwick and around the country with a newfangled product to capitalize on the projected decrease.
The New York-based company last month launched a 30-year adjustable-rate mortgage (ARM) with a twist: a rate cap of 6.99 percent for the first 10 years of the loan, plus a promise that the rate will fall if interest rates decrease.
For consumers, the pitch is that the so-called “Homeowner Protection ARM” offers protection from rising rates, yet still enables borrowers to take advantage of any future decrease in rates. For the company, one benefit is that recipients of the loans may be less likely to refinance their debt with another bank if rates do drop.
Thomas Carroll, a senior loan officer at the Warwick office of New York Mortgage, said the hybrid ARM will help him attract more borrowers.
He noted that the mortgage business has slowed this year, along with the housing market.
“Obviously, things have slowed down, partially due to the increases in interest rates,” Carroll said. Those rising rates have particularly affected demand for ARMs – on which payments adjust up or down, as key interest rates increase or decrease – because the loans’ rate changes have saddled some borrowers with outlays beyond what they can afford.
Carroll said he has pitched the new “protected” loans to several people in the past month, and though people are initially turned off when they hear “ARM,” they warm up to the idea after they learn about the rate cap and the chance of lower payments if rates drop. The loan officer said he was about to close one of the new loans.
The way the loan works, according to Carroll and New York Mortgage, borrowers get an introductory rate of 6.25 percent for the first three months. Afterward, rates are adjusted monthly, to 1.5 percentage points above the London Interbank Offered Rate, which last week was 5.38 percent, according to Bankrate.com, yielding a theoretical loan rate of 6.88 percent.
Borrowers also can opt for an interest-only payment plan for the first 10 years. That would lower monthly costs during the first decade of the loan, but would increase its cost in later years, when the principal becomes due.
The loan sets limits on rate decreases, as well as increases, so the adjustable rate can never go below 4 percent. Yet, with rates capped at 6.99 percent, the new loans still could be a win for many consumers.
“It does provide a borrower who would select one of these ARMs some protection against rising interest rates,” said Keith Gumbinger, a vice president at HSH Associates, a financial-services research firm based in Pompton Plains, N.J.
New York Mortgage has no competitors, to Gumbinger’s knowledge, who offer a mortgage with the same features as its new ARM.
Many ARMs come with fixed rates for the first one to 10 years, then revert to adjustable rates for the remainder of the lending period.
New York Mortgage is a subsidiary of New York Mortgage Trust, a real estate investment trust (REIT), which retains ownership of the subsidiary’s loans. Gumbinger said many lenders sell their mortgage debt to other companies, instead, which gives them less flexibility in setting terms for their loans.
Why did the New York-based REIT decide to offer the new ARM?
“We wanted to establish ourselves as a unique lender with something that nobody else has,” said David Akre, co-chief executive officer of the trust. Some capital-market analysts are predicting interest rates will drop consistently through 2007, he noted.
“The market is saying, right now, that rates will be lower than they are today,” Akre said, “and we are passing through that savings to the consumer.”
