The Great Western Financial Corp. is making a concerted effort to capitalize on the resurgence of activity in adjustable-rate mortgages and at the same time provide safeguards for homebuyers.

The Chatsworth, Calif.-based company has introduced a three-step, tiered-cap mortgage offering six years of protection against escalating interest rates.

The lender is one of many that are going to lengths to attract borrowers seeking adjustable-rate mortgages. As interest rates have risen this year, adjustables have come charging back in popularity. Indeed, a recent study by the Federal Housing Finance Board showed that 31% of all conventional mortgage loans in April were adjustables.

Great Western currently has $500 million of applications in the pipeline for the tiered-cap loan and is stepping up its marketing efforts through an intensified print advertising campaign.

The ARM is being offered through the company's Great Western Bank and Great Western Mortgage Corp. subsidiaries.

"This has become an ARMs market after several years of being a low-interest, fixed-rate environment," said Sam Lyons, senior vice president mortgage banking at Great Western Financial. "All of a sudden ARMs are in again and fixed rates have fallen by the wayside."

He said that when Great Western detected that this was going to be the scenario, the company tried to develop an ARM that would appeal to a broad section of the public.

Great Western came up with the idea of putting interim-rate caps on the ARM, which is based upon the traditional 11th district Federal Home Loan Bank cost-of-funds index.

"Right now we have an initial rate of 3.65% for three months, and then it begins to adjust monthly thereafter at a spread over the index." he said.

"That spread at the moment happens to be 2.45% and the index at the moment is 3.73%," Mr. Lyons said. "So when it begins to adjust after the first three months, you would have a fully indexed rate of 6.18%.

"Then it adjusts each month based on that spread over the index because the index comes out monthly," he said.

Lifetime Cap of 11.25%

The new loan has a lifetime interest rate cap of 11.25%. "But we have come up with interim-rate caps so for the first three years the rate cannot go above 7.75%, no matter what the index is," he said. "For the second three years the rate cap is 9.75%."

Beginning with the seventh year, the mortgage is subject to an 11.25% lifetime cap. "It can't go above that," Mr. Lyons said.

"There is another important feature," he added. "The minimum monthly payment cannot increase more than 7.50% annually. That's to keep payment shock under control."

Analysts say the tiered-cap mortgage has particular appeal to borrowers who trade up about every seven years.

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