The Department of Housing and Urban Development published a regulation on the Federal Register last week increasing the initial or periodic interest rate cap as well as the life reset on FHA-insured 5/1 ARM loans. The new rule, effective April 28, raises the periodic cap on FHA-insured 5/1s to 2% from 1% and the life cap to 6% from 5%. The new caps allow the differentiation between the FHA's 5/1 ARM program and its 3/1 program. Currently, only ARMs with initial reset periods of three years or less are allowed a 1% interest rate adjustment. The HUD has also invited interested parties to submit comments on the new rule by May 31.

In the published regulation, the HUD stated that it is aware of the concerns among mortgage lenders and borrowers regarding the 1% limitation on the annual interest rate adjustment for 5/1 ARMs, stating that the concerns center around the fact that the 1% cap does not accurately reflect the realities in the mortgage sector. For instance, HUD said that conventional mortgage lenders do not provide 5/1s with a 1% cap on annual interest rate adjustments, adding that this inability makes the FHA-insured 5/1 ARM less attractive to borrowers and lenders alike since the appeal of the product is driven by the lower initial interest rate.

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