UPDATE: To Tempt Buyers, Toll Tries Adjustable-Rate Mortgages
July 13 2009 - 1:57PM
Dow Jones News
Toll Brothers Inc. (TOL) is dusting off one of the housing
boom's popular sales strategies: This weekend, the luxury home
builder rolled out its twist on adjustable-rate mortgages, tempting
buyers with 3.75% for seven years on conforming loans.
While the company is one of the first to revive the product
since the sector's implosion, it's a move likely to be copied,
despite the history of this type of loan.
"Anytime the buyer sees the word 'ARM' they're afraid," said
Stephen Melman, the National Association of Home Builders' director
of economic services.
During the boom, consumers were lured by loans that offered
shockingly low rates, only to see them reset, sometimes quickly,
with crippling payments. Those betting on climbing housing values
to aid refinancing have been disappointed as prices continue to
fall. But Toll's offer - the latest in a long line of
profit-eroding incentives to come from builders - didn't spark talk
of another housing bust.
The company, one of the industry's most respected, says there's
nothing exotic about this offer, available in many communities
nationwide for contracts inked on or after last Saturday. Following
the rate-lock period, the mortgage resets annually at 225 basis
points over Libor, an interest-rate benchmark, so the rate could
even fall. The loan's lifetime cap is 8.75%, though "Libor would
have to go up dramatically from where it is today," said Don
Salmon, chief executive of TBI Mortgage Co., Toll's mortgage
subsidiary.
For a true jumbo loan, the rate for a 7/1 ARM - which is set for
seven years and then adjusted once a year thereafter - is 4.75%,
with a 275-basis-point margin over Libor. There are no points to
pay. Borrowers, who have to have a 720 credit score and put 20%
down, can later refinance or sell the residence without
penalty.
While the risk of home-value deterioration remains, Horsham,
Pa.-based Toll said it just ended its best week for traffic since
early June.
"If traffic is up, they're really an industry leader, then. I
think they're going to reach a lot of people who say, 'Man, this
makes sense for us,'" said Melman, who took out a 7/1 ARM in 2003.
"I think they hit a home run on this thing."
Of course, it's too early to say if the rate will be enough to
boost sales amid an elevated and swelling number of foreclosures,
which pose stiff competition because foreclosed properties
typically sell at steep discounts. Lending standards also remain
strict, with even well-qualified buyers having difficulty getting a
loan.
Because Toll caters to the move-up crowd, many would-be buyers
have to sell an existing home, not all that easy in the current
downturn.
This deal would make sense for consumers not looking to stay in
a residence beyond seven years. And, because Toll caters to a
wealthier clientele, this could appeal to those who could afford a
higher rate but see the lower introductory percentage as
financially savvy.
"What could be is the numbness from the subprime crisis might be
receding, with an educated consumer realizing this could be a great
deal if your personal situation fits," Melman pointed out.
That's good news for buyers but, as with all incentives, Toll
pays a cost. To tout lower rates, builders offer an upfront cash
payment to the investor who buys the mortgage in a "buy down." It
is treated as a cost of sale for the builder. Toll would not say
how much this program costs.
Still, its margins remain among the sector's best, though they
have fallen from their peak.
Because builders copy each other's marketing moves, others could
soon roll out their own ARM version. As they limp through the worst
downturn in decades, builders have tried everything to sell homes,
including throwing in free upgrades, paid closing costs, vacations
and even trying a down payment lay-a-way plan. Earlier this year,
Toll shocked the industry with a rate fixed at 3.99% for the loan's
life. Hovnanian Enterprises Inc. (HOV) did the same. At one point,
Lennar Corp. (LEN) shaved its rate to 3.625%.
After learning of Toll's move, Hovnanian said it would consider
a similar deal if its individual builders request it. But with
fixed rates averaging above 5%, consumers are opting for fixed-rate
security.
Our divisions will "definitely monitor what kind of traffic and
sales that would drive" said Dan Klinger, president of K. Hovnanian
American Mortgage. "You've got to be open to whatever the
consumer's looking for. If it proves the consumer likes this...then
all of us better find a way to get at it."
-By Dawn Wotapka, Dow Jones Newswire; 212-416-2193;
dawn.wotapka@dowjones.com