Once again, analysts and lenders are at odds, this time about risk in adjustable-rate mortgages.
Peter Rubinstein, a mortgage economist for Moody's Investors Service Inc. in New York, maintains that ARMs are a lot more risky than investors think.
"People get lulled into thinking things," Mr. Rubinstein said. "The truth is, the risk is really there."
The risk is hidden in the performance measurements of ARM pools, he said.
Companies such as Mortgage Information Corp., based in San Francisco, provide measures of risk in pools of mortgages by reporting on delinquency and foreclosure rates and levels of real estate owned.
Mr. Rubinstein wrote in "ARMed and Dangerous," a report released Nov. 17, that because fixed-rate pools shrink more than ARM pools during periods of heavy refinancing, it appears that ARM pools are not as risky.
Bunk, say some lenders.
"Our adjustable performance is not inherently different from fixed-rate performance," said Gary R. Garrett, senior vice president of Coastal Banc Savings Association, Houston.
But one must look at loss rates, Mr. Rubinstein said, to make ARM risk more apparent.
"If you don't have the loss data, you're missing a piece," Mr. Rubinstein said. He said ARM pools need 20% to 60% more credit support than fixed-rate pools.
Steve Phillips, product manager at Mortgage Information Corp., agreed that lenders may be whistling in the dark about ARM risk. "Until you know what you lost from the foreclosure, you can't know what the risk was," he said.
His company will soon introduce a measure of losses incurred by banks on foreclosed properties, Mr. Phillips said.
In his report, Mr. Rubinstein offered four reasons for ARMs' greater risk: cutthroat teaser rates, higher loan-to-value ratios, limited-documentation programs, and the weak economy in California.
Lenders agree that an ARM with an exceptionally low teaser rate, underwritten without considering the possibility of a severe jump in rates, is more risky. But most ARMs are not underwritten in this manner, Mr. Garrett said.
He is also not convinced loan-to-value ratios are higher for ARMs.
