Call To ARMS-And Other Products

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Credit union members are apparently listening to the advice offered by Alan Greenspan.

The Federal Reserve Chairman told attendees to CUNA's Governmental Affairs Conference in February that consumers may want to consider adjustable-rate products when buying a home in order to help lower their monthly payments.

That advice from the sage of the markets, coupled with the rise in long-term interest rates since the first of the year, has helped propel increasing numbers of credit union members into waiting ARMs.

In fact, adjustable-mortgages made by credit unions grew by 4.7% for the month of June, and by almost 13% since the first of the year; while growth among fixed-rate mortgages has been less robust, at 1.2% for June and just 3% for the first six months of the year, according to data compiled by CUNA.

"We've always recommended that our members go into 15-year and 30-year (fixed-rate) mortgages as a more conservative, more stable option," said Tom Steele, executive vice president for lending at Navy FCU, which has seen the ARM share of its mortgage loans grow from just 1% a year ago to more than 20% this year. "But now, the competition has gotten out there, of course, with a whole range of products, and we've joined them."

Steele attributed the call to ARMs to a combination of things.

First is the fact that Navy FCU, the nation's largest mortgage lender among credit unions, did not offer many ARM products in the past, just the standard one-in-one (one-year fixed at a low rate) and three-in-one ARMs.

Second, was the fact that last year rates on long-term, fixed-rate loans had declined to 50-year lows, making them a good investment for borrowers. "People were seeing rates that we've never seen before, or haven't seen in a long time," said Steele. "But now, we've been seeing a little bit of a change in long-term rates, they've been starting to move up."

To take advantage of the trend, Navy, which made $3.7-billion in mortgage loans through the first seven months of the year, has added several new ARM products since April, including a five-in-one ARM; a seven-in-one loan; and a 10-in-one product.

So, for example, Navy was offering 30-year, fixed-rate loans with no points at 5.87% last week; while the rate for a three-in-one ARM was 4%; for a five-in-one ARM 4.75%; and for a seven-in-one ARM 5%.

The upside to opting for an ARM, noted Steele, is that members can save thousands of dollars with the lower rates. The downside is that if rates turn up when the guaranteed period of the lower rate expires, they could be forced to pay higher rates when that happens.

Last week, the nation's largest credit union began offering a new mortgage product, an interest-only mortgage, on which borrowers can choose to pay only interest and defer principal payments until later on. This product, pointed out Steele, can appeal to those homebuyers who may have limited resources to buy a house now and may expect to have greater resources (financing) later on.

"These are special products and they're not for everybody, and we're very careful when we counsel our members what they may be in for," explained Steele.

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