FHA nearing limit on its popular ARMs Amid high demand, some lenders stop offering them; Real estate


Area lenders are beginning to pull FHA adjustable-rate mortgages off their product menus as they anticipate that the FHA's authority to insure such loans is rapidly running out because of high consumer demand.

The loans, known as ARMs and insured by the Federal Housing Administration, represent approximately 25 percent of all FHA loans. They are popular because their initial rate generally is 1 percentage point to 2 percentage points lower than FHA or conventional 30-year fixed-rate mortgages.

Steve O'Connor, a senior director with the Mortgage Bankers Association in Washington, said yesterday that it is not uncommon for the FHA's insurance authority to run out; it usually happens in August or September, near the end of the government's fiscal year.

What is unusual "is having this fiscal problem this early in the year," O'Connor said. And -- with half the fiscal year to go before the next one begins Oct. 1, when the FHA's authority will be renewed -- lenders are opting not to expose themselves to the possibility of being saddled with uninsured loans that may go into default.

"It does have a consumer impact in that someone goes to a lender and the lender says that they aren't doing FHA [adjustables] anymore," O'Connor said. "They are not going to understand why. Because lenders are afraid if they do ARMs now, they won't be able to get them insured until after Oct. 1."

O'Connor said that his organization is working with HUD to find a solution to the problem.

Fixed-rate FHA loans are not affected.

FHA adjustable-rate mortgages play a significant part for new-home builders, who often cater to first-time buyers or consumers who need the lower interest rate to qualify for a loan. FHA loans require lower down payments than do conventional loans, provide more flexible qualifying ratios and allow some closing costs to be financed.

Linda Veach, senior vice president for Bob Ward Homes, the area's fourth largest builder, said the loss of FHA mortgages will affect the number of people who will be able to get into homes.

"It takes away the purchasing power of a lot of people," Veach said, adding that it takes some people "right out of the market."

For example, Veach said, a buyer taking out a $100,000, FHA adjustable, 30-year loan at 5.25 percent -- her last quote available -- would pay $552 a month in principal and interest.

For yesterday's 30-year fixed FHA mortgage quote at 7.25 percent, the principal and interest jumps to $665, a difference of $113 a month.

Five of the six lenders that the Harford County builder uses already have stopped offering FHA adjustable loans.

T. Kevin Carney, president of Thomas Builders, said the five lenders he uses also have dropped the product.

"Eighty percent of my business is FHA, and of that, 75 percent are in ARMs," said Carney. He said the "freezing effect" is playing havoc with settlements that are scheduled for April. O'Connor said the insurance funding is based on a formula in which the number of adjustable-rate mortgages that the FHA can insure is limited to 30 percent of the total number of single-family loans it insured the previous year.

In fiscal year 1997, the FHA insured 790,359 loans. This fiscal year, it can make only 237,107 adjustable-rate mortgages.

"As of last week, they [FHA] had insured roughly 166,000, so do the math and they have 70,000 adjustable-rate mortgages left before they hit their cap," O'Connor said.

Theodore E. "Chip" Reichhart Jr., president of MNC Mortgage Corp. in Lutherville, downplayed the situation.

"As for loans that are locked in and settling before the end of March, there shouldn't be any problem at all. Those loans should hit the insurance before it runs out," Reichhart said.

Pub Date: 3/19/98

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