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Special Reports
Not Your Father's ARM Loan
Strong Secondary Market for Adjustables
By Bonnie Sinnock
NEW YORK--The secondary market for adjustable-rate mortgages has really heated
up in the past year.
Secondary market investors have had a hearty appetite when it comes to ARMs. In
fact, ARMs have been so popular they have stolen attention away from the more standardized fixed-rate mortgage
investments, contributing to the latter's unprecedented decline to lower volume levels.
The secondary market for ARMs has been "incredibly robust," according
to Michael Dubeck, an executive director at a Morgan Stanley conduit unit that buys ARM loans from originators.
"Off the charts," he said.
Combined, non-agency and agency ARM issuance last year increased to $435 billion
last year from $328 billion the year previous, Bear Stearns vice president Peter Grouev noted in a recent investor
presentation.
Non-agency issuance has been particularly strong. According to Mr. Grouev, while
non-agency ARMs represented $125 billion in issuance in 2003, they totaled $247 billion last year. (Agency ARM
issuance, meanwhile, fell to $188 billion in 2004 from $203 billion the year previous but still contributed to
what overall was a banner year for ARMs in the secondary market, Mr. Grouev said.)
Among the factors that may have boosted the market over the past 12 months may
be an increased comfort with and understanding of newer developments in the ARM market.
The ARM market today has a different geographic profile and higher volumes of
different product types. These differences have been a challenge for secondary market investors who find it easier
to size up risk and value investments when they are dealing with standardized products with some performance history
behind them.
Hybrid ARMs, in general, were "not well understood until some time in the
middle of '04," said David Akre, co-chief executive of New York Mortgage Trust.
Similarly, interest-only ARMs have been "slow to be accepted" but have
"data points" that have been coming in "reasonably strong," said Robert Cole, chairman and
chief executive officer of New Century Financial Corp.
Perhaps even more important in terms of the market's growth than the growing familiarity
and acceptance of today's ARMs has been their attractiveness relative to other competing investments. Mr. Grouev
said that hybrid ARMs have had superior valuations relative to other asset types.
ARMs have definitely been hot. But whether they remain so may depend on whether
these favorable secondary ARM market conditions last.
"Time will tell," Mr. Cole said.
"We'll see what happens," said Mr. Akre.
According to Mr. Grouev, the secondary market for ARMs will still be a fairly
healthy one in 2005. Agency ARM issuance is expected to fare well this year but ultimately may slide 6% lower in
dollar volume. Meanwhile, non-agency ARMs are expected to fall 20% in volume but "still command a market share
of over 65%."
Mr. Grouev has forecast that market participants' respective appetites for ARMs
will be as follows in the coming year:
- Money managers will have a "continued strong presence" in the agency
ARM market and remain active in the non-agency sector as well.
- Government-sponsored enterprises will have an "increased participation"
in the agency ARM market but be relatively less active in the non-agency sector.
- Banks and thrifts will see "moderation" in their purchases and be typically
more active in non-agencies.
- Real estate investment trusts will have an "increasing presence" in
the market.
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