Toll Brothers Inc. is dusting off one of the housing boom's popular sales strategies: This past weekend, the luxury home builder rolled out a hybrid adjustable-rate mortgage.
Though the company is one of the first to revive the product since the sector's implosion, the move is likely to be copied, despite the history of this type of loan.
"Anytime the buyer sees the word 'ARM' they're afraid," said Stephen Melman, the director of economic services a the National Association of Home Builders.
Toll says there is nothing exotic about this loan offer, available in many communities nationwide for contracts signed on or after last Saturday. For loans under the conforming limit ($417,000 in different parts of the country), the rate is fixed at 3.75% for seven years. After the fixed-rate period, the mortgage resets annually at 225 basis points over the London interbank offered rate. The rate's lifetime cap is 8.75%, though "Libor would have to go up dramatically from where it is today" to hit that ceiling, said Don Salmon, the chief executive of TBI Mortgage Co., Toll's financing subsidiary.
For jumbo loans — those larger than the conforming limit — the initial fixed rate is 4.75%, with a 275-basis-point margin over Libor after the fixed period.
There are no points to pay or prepayment penalty. Borrowers must have a credit score of at least 720 and put 20% down.
It is too early to say if the rate will be enough to boost sales amid a swelling number of foreclosures, which pose stiff competition because foreclosed properties typically sell at steep discounts. Because Toll caters to the move-up crowd, many would-be buyers have to sell an existing home, not all that easy in the current downturn.
This deal would make sense for consumers not looking to stay in a residence beyond seven years. "What could be is, the numbness from the subprime crisis might be receding, with an educated consumer realizing this could be a great deal if your personal situation fits," Melman said.
As with all incentives, Toll pays a cost. To tout lower rates, builders offer an up-front cash payment to the investor who buys the mortgage. This so-called buy-down is treated as a cost of sale for the builder. Toll would not say how much this program costs.
Because builders copy one another, others could soon roll out their own ARMs. In the worst downturn in decades, builders have tried everything to sell homes, including free upgrades, paid closing costs, vacations and even a down payment lay-away plan. Toll, of Horsham, Pa., shocked the industry this year with a rate fixed at 3.99% for the loan's life. Hovnanian Enterprises Inc. did the same. At one point, Lennar Corp. shaved its rate to 3.625%.
After learning of Toll's ARM, Hovnanian said it would consider a similar offering.
Its divisions will "definitely monitor what kind of traffic and sales that would drive," said Dan Klinger, president of the K. Hovnanian American Mortgage unit. "You've got to be open to whatever the consumer's looking for. If it proves the consumer likes this … then all of us better find a way to get at it."