Borrowers Increasingly Taking out ARM Mortgages to offset Rising Interest Rates

According to the latest Originations Market Monitor covering the month of February, Black Knight said demand dips are causing the real estate market to lose some steam as rate lock applications dropped as loan production shifted toward jumbos, which offer more favorable rates than Government Sponsored Enterprises (GSEs) can. 

“Mortgage rates ticked up again in February after a brief respite, showing once again just how rate sensitive the market continues to be,” said Kevin McMahon, president of Optimal Blue, a division of Black Knight. “Conforming rates dipped below 6% early in the month but finished it up 52 basis points from January. Even though the number of rate locks was down month over month, dollar volume increased due to a rate environment that favored jumbo and ARM loans over GSE products. Essentially, though, the story remains the same – one of a market facing significant interest rate-driven headwinds. As Black Knight reported last week in our latest Mortgage Monitor, there were clear signs of buyside demand when rates neared 6% – it just quickly pulled back when rates began to climb again.” 

“As rates resumed their upward trajectory in February, borrowers responded predictably, moving toward more rate-favorable offerings,” McMahon continued. “That included a shift to jumbos, ARMs and other nonconforming products in the month. With refinance activity basically at a floor, all eyes are on the purchase market. And yet such lock volumes remain more than 40% down from last year’s level, with the triple-threat of rate, affordability and inventory challenges still looming large for the foreseeable future.” 

Other notable data revealed in the report includes: 

  • Rate lock dollar volumes rose 2% month over month in February, although the number of locks dropped, as loan production shifted toward jumbos, which offered more favorable rates than GSE products 
  • Purchase lock volumes rose 4%, driven by seasonal tailwinds, while cash-out refinance volumes fell 11% on rising interest rates and rate/term locks remained near record lows 
  • The refinance share of the market fell back to 14% of overall activity, the low point in this cycle first reached in October 
  • Despite the month-over-month gains, purchase lock counts – which exclude the impact of home price changes – are well below both last year’s (-42%) and pre-pandemic (-35% against 2020) levels 
  • Nonconforming loans – including jumbos and expanded guidelines – picked up share relative to all other loan products (12.2%), while conforming (56.6%), FHA (18.4%) and VA (12.0%) products all lost share 
  • Likewise, the ARM share of lending popped back above 10% in February as the rise in rates pushed borrowers to consider alternatives to fixed-rate loans 
  • Optimal Blue Mortgage Market Indices from Black Knight showed 30-year rates dipped below 6% for the first time since September, before rising 52 basis points to finish the month at 6.68% 
  • The spread between the 10-year Treasury and 30-year conforming mortgage rate widened by 12 basis points as Agency MBS sold off relative to Treasuries in response to revived inflation concerns 
  • The average loan amount rose from $340K to $349K, while the average purchase price climbed from $421K to $434K 
  • Credit scores remained essentially flat for cash-out refis and purchases but dropped 7 points for the limited number of rate/term refi locks 

Click here to view the report in its entirety. 

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