'New Mortgage Option Needed'

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Federal Reserve Chairman Alan Greenspan lauded the role credit unions play in the financial services market and called on credit unions and other lenders last week to help consumers further by expanding the types of mortgage products they offer.

"Credit unions have long focused on the needs of their members," stated the Fed Chairman, speaking at CUNA's GAC.

After years of rising, Greenspan said household debt levels have generally stabilized over the past two years because of the mortgage refi boom,, helping mitigate the huge losses consumers have experienced in the stock market and helped put American households in "good shape."

But, in an unusual recommendation on interest-rate options, the Fed Chairman suggested consumers could be aided even more in the short-term by lower rates offered on adjustable-rate loans. "American homeowners clearly like the certainty of fixed-rate mortgage payments," he noted. But homeowners could be paying as much a 0.5% to 1.2% more for the benefits of fixed rates, he said.

Those homeowners, he suggested, "might have saved tens of thousands of dollars had they held adjustable-rate mortgages, rather than fixed-rate mortgages during the past decade."

Adjustable-rate mortgages, which usually average 150 basis points-to-200 basis points below the average for 15- and 30-year fixed-rate loans, have become increasingly popular among American homebuyers over the past few years because of the frequent fluctuation of mortgage rates. According to the Mortgage Bankers Association, ARMs accounted for 27% of all mortgage applications in the week ending Feb. 20.

The MBA, which produces a weekly survey of all the major mortgage markets in the country, said the average rate for one-year ARMs was 3.36% last week, compared to 5.49% for 30-year fixed-rates loans, and 4.79% for 15-year, fixed-rate mortgages.

Many credit unions have expanded their ARM offerings in recent years to include such hybrid products as five- and seven-year ARMs, and so-called step-up products in which the rate rises under certain conditions.

While the lower rates on ARMs can hurt borrowers if rates spike upwards, they can save the average homeowner thousands of dollars a year in lower principal payments in the short-term, Greenspan noted. "American consumers might benefit if lenders provided greater mortgage-product alternatives to the traditional fixed-rate mortgage," he stated. If homeowners are worried about a sudden jump in mortgage payments but are "willing to manage their own interest-rate risk, the traditional fixed-rate mortgage may be an expensive method of financing a home."

Adjustable-rate mortgage products are popular with lenders overseas, explained Greenspan.

Greenspan said the refinancing boom of the past two years, in which borrowers have replaced existing loans with lower-term mortgages, has helped boost real estate assets by $14 trillion, helping offset the massive losses experienced by investors in the stock markets. It has also helped stabilize both the average debt service ratio (the percentage of household income spent on interest and principal payments) at 13%, and the average financial obligations ratio (debt service, plus insurance, eases, property taxes) at 18%. This was in contrast to the 1990s, when both ratios rose rapidly, said Greenspan.

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