BASKING RIDGE, N.J.-Affinity Federal Credit Union has rolled out a 5/5 Adjustable Rate Mortgage it said provides members the best of both worlds-access to low rates with several protections built in.

Robert Birkhahn, EVP and chief member relationship officer for the $2.2-billion CU, said adjustable rate mortgages earned a bad reputation during the housing crisis because repricing ARMs put payments out of many homeowners' reach. However, he told Credit Union Journal, Affinity FCU felt if the product was constructed properly it still can be advantageous for the lender and the borrower.

"The bad press ARMs got made a lot of people afraid of them," he said. "Every lender across the land has been pushing fixed-rate loans, while the ARM was a four-letter word."

The consumer mindset has improved, Birkhahn continued, but financial advisors and CPAs continue to tell people to get a fixed-rate mortgage for as long as they are going to hold on to their house. He said Affinity offers an adjustable rate mortgage to people who do not qualify for a fixed rate, and the CU explains that a 5/5 is not as volatile as a loan that reprices every year.

"The average homeowner stays in their house for seven years. So if you look at the blended rate over 10 years, a 5/5 is much better than a traditional 5/1 ARM that reprices every year."

Affinity FCU's 5/5 ARM (it reprices every five years) is capped at two to three percentage points at the five-year point, and five to six percentage points over the life of the loan.

Birkhahn said Affinity previously offered a 6/2 loan product that had terms out to 40 years.

"We noticed the 5/5 was an interesting product in the industry-more so on the East Coast," he recalled. "We coupled with what was happening in the fixed-rate environment, while trying to put members in a mortgage that takes advantage of the great rates that are available without the institution taking on too great an interest rate risk."


Education an Obstacle

Affinity FCU began offering its 5/5 ARM in the first quarter of this year. Birkhahn said "some folks are taking advantage," but the biggest obstacle remains education of members.

"It is the second-most popular product among mortgages," he said. "We are doing mostly refinances in New Jersey. Everybody is shortening up their amortizations to get back the equity they lost when values dropped 27% here. So people are shifting from 30-year loans to 20-year loans, from 20 years to 15, and so forth."

Over the past three years Affinity FCU has refinanced close to 85% of its portfolio, Birkhahn noted. He said loan volume remains "good," but down from the high years.

"Purchase mortgages are slow-only 15% of our portfolio. This is really impacted by what is going on in the state because 85% of our membership is from New Jersey," he said. "Purchases will remain anemic until homes regain their value and the employment picture improves. The national unemployment rate is 8.2% but in New Jersey it is 9.3%. We are even seeing high-rent district counties selling homes for less than $300,000 for the first time in years. People just aren't putting their homes up for sale because they are not going to get top dollar, and there are so many short sales they are lowering the value."

Affinity FCU is promoting the 5/5 ARM to its membership through standard internal marketing, but is not using any external advertising, Birkhahn said.

"People are happy to have the loan available, and to me options are great for members."

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