Fannie Mae Is Mounting a Major Assault On Abuses of Adjustable-Rate Mortgages
WASHINGTON -- The Federal National Mortgage Association is mounting a major assault on some abuses in adjustable-rate mortgages, which have fueled the recent housing recovery.</br></br>With such mortgages, dubbed ARMs, monthly payments change periodically along with prevailing interest rates. Their lower initial rates have made homes available to millions of families in recent months. Roughly two million home buyers have taken out more than $120 billion in ARMs since 1981. Industry figures show that they accounted for more than 75% of the $13 billion in new home loans made in February.</br></br>Fannie Mae is worried because certain ARMs, largely marketed in Texas, California and the Southeast, provide first-year interest rates far below those of fixed-rate mortgages but with little or no limit on increases in future mortgage payments. With such arrangements, "consumers could be turned off on an instrument that's essential, and secondly, the issue could become politicized," warned David Maxwell, chairman of the government-sponsored, privately owned association, in an interview. Yet ARMs "are the key to the long-term solvency of our financial institutions," he added.</br></br>The association's crackdown is taking three forms: A call to the lending industry to police the problem ARMs, restrictions on the type of ARMs Fannie Mae buys and inauguration of a consumer-education program. Its efforts carry considerable clout; Fannie Mae, the nation's leading supplier of home mortgage funds, holds nearly $9 billion of ARMs in its $80 billion mortgage portfolio.</br></br>Mr. Maxwell is expected to emphasize Fannie Mae's concerns in a speech today before the Texas Mortgage Bankers Association in Fort Worth. A line exists "between helping home buyers fulfill their aspirations and encouraging them to borrow beyond their means," Mr. Maxwell's prepared remarks state. "And we who care about the long-term health of the housing and mortgage industries should be the first to turn the spotlight on abuses in the marketplace."