Nearly 16 months after securing Congressional approval to insure hybrid adjustable rate mortgages, the Federal Housing Administration has proposed offering borrowers a choice of four different options.

Under a proposal put out for a 60-day comment period this week, home buyers and refinancers would be allowed to choose loans with rates that remain fixed for three, five, seven and 10 years before adjusting on an annual basis thereafter.

Under the FHA's proposal, once the shorter term 3/1 and 5/1 loans convert to adjustables, rates cannot change by more than 1 percent per year over the remaining term and no more than 5 percent over the loan's life.

For the longer term 7/1 and 10/1 loans, changes are limited to 2 percent annually and 6 percent totally over the remain term.

But the mechanics of the loans are still not totally acceptable to the Mortgage Bankers Association, which would like to see higher caps on the five-year product. The MBA says rates on 5/1 hybrid should be allowed to adjust under the same rules as the 7/1 and 10/1 loans. Otherwise, lenders won't want to offer them.

"A maximum 1 percent increase in the interest rate at the time of the first rate adjustment for a 5/1 hybrid ARM does not offer sufficient interest rate flexibility for a lender to offer this type of hybrid ARM at a lower interest rate than a traditional 30-year fixed rate mortgage," the MBA says in its position paper.

For the most part, conventional hybrid ARMs allow for annual rate increases of up 2 percent and total rate adjustments of up to 6 percent, no matter their duration.

Last year, the MBA mounted a campaign to rewrite the legislative language authorizing the FHA to insure hybrids for the first time, maintaining that the fiscal 2002 appropriations bill will not accomplish its intended purpose of offering FHA borrowers a full range of hybrid ARMs.

A provision to raise the cap on the first adjustment on a 5/1 ARM from 1 percent to 2 percent was included in the Housing Affordability for America Act of 2002 introduced by former Rep. Marge Roukema (R-NJ) and co-sponsored by 73 other legislators. The measure was cleared by the House Financial Services Committee but never made it to the House floor.

The President's proposed FY 2003 budget for HUD did not include any provision for amending the hybrid ARM legislation to restrict the 1 percent limit on the first interest rate adjustment to 3/1 ARMs only. But the MBA is still hoping either lawmakers or HUD will make what it sees as a "technical correction." The only FHA-insured ARM currently available has a one-year fixed payment period and caps of 1 percent and 5 percent, respectively.

HUD Secretary Mel Martinez said the new products are "another financing tool for making more affordable housing available." HUD estimates that as many as 40,000 families a year will choose from one of these hybrid loans to finance their houses.