Most homeowners who do hold adjustable-rate mortgages (ARMs) hold those that are initially the least risky, according to the third major study this year aimed at deflating major provisions in bubble market theories.

The Federal Reserve Board's Senior Loan Officer Opinion Survey on Bank Lending Practices for July reported 45 percent of domestic loan officers said conventional ARMs that reprice at regular intervals accounted for less than 10 percent of all home mortgage loans on their books. Most institutions reported that the loans accounted for less than five percent with only 12 percent saying the share was greater than 50 percent.

Responses received from only 30 percent of the 56 lenders surveyed indicated "hybrid" ARMs -- those with an interest rate that is initially fixed for a multi-year period, but subsequently adjusts more frequently -- accounted for more than one-half of all residential mortgage loans on their books.

On the average, almost 90 percent of conventional ARMs held were due to adjust within the next 12 months while on average only 12 percent of the hybrids were due for repricing.

The loan officers also said that almost 60 percent of hybrid ARMs, on average, will not be repriced for at least three years.

More than 50 percent of the officers reported that hybrid ARMs accounted for at least 75 percent of all ARMs originated during the past three months, and another 17 percent of respondents indicated that such loans accounted for between 30 percent and 75 percent of all originations over that period.

Bubble-market theorists say, in part, that there are too many over-priced homes financed with too many high-loan-to-value conventional ARM loans, which, as interest rates rise, can cause a household's budget to melt down with the potential for foreclosure. If too many over-leveraged homeowners lose their homes, the market could be flooded with housing that depresses values.

The argument might well fly in select local markets. Real estate ups and downs are, after all, a product of local market conditions, but nationwide there simply aren't enough mortgages and loans of concern to cause a national melt-down.

The Fed's April loan officer survey found that over the prior year, 60.3 percent of the mortgage originations came with loan-to-value ratios that were less than 80 percent. An additional 25.8 percent came with ratios from 80 to 89 percent. The remainder, only 14 percent, had higher ratios, from 90 percent to more than 100 percent.

Even when second mortgages were included (including equity loans), only 19 percent of the loans officers held had loan-to-value ratios of 90 percent or more. The survey found 29.6 percent of total mortgage indebtedness had ratios of 80 to 89 percent and most of the home loans represented a loan-to-value ratio of less than 80 percent.

As for concerns about too many ARMs, some states and population groups do carry a disproportionate share of riskier loans, but the Federal Housing Finance Board found that only 18 percent of consumers nationwide opted for adjustable-rate mortgages in 2003.

Published: August 27, 2004

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A journalist for 35-years, Broderick Perkins parlayed an old-school daily newspaper career into a digital news service offering editorial content and consulting services. Perkins' San Jose, CA-based DeadlineNews Group includes the flagship news site, DeadlineNews.Com, offering real estate, personal finance and consumer journalism, and a backshop, the Deadline Newsroom.