Adjustable Rate Mortgages – An ongoing challenge that impacts your members

Members with adjustable-rate mortgages pose an increased risk. What can you do to better understand and mitigate your risk?


Consumers with adjustable-rate mortgages face a number of challenges in the sagging housing market.  As many ARMs near their initial reset date, consumers holding the ARM have very few viable options.  Declining property values (which have led to upside-down mortgages in many instances) and tighter lending criteria limit the refinancing options available to consumers.  A glut of homes available for sale makes the option of selling the property equally as challenging.  The end result is that many of these consumers must remain in their ARM, face the initial rate change and try to find the funds to make their higher monthly mortgage payment.

This situation presents a challenge for credit unions that have members with ARMs that are about to reset or that have already reset. Credit unions must consider how a resetting ARM may impact the member’s ability to repay their other debt obligations.  Does the resetting ARM put the member’s credit card, home equity loan, auto loan or other payments at risk?

Another challenge for credit unions is that ARM resets are not a short-term issue and will continue well into future years.  The concern around ARM resets until recently focused primarily on the subprime consumer base.  In future years, the volume of initial resets shifts away from the subprime consumers and moves more towards the prime and near-prime consumers.  Analytic studies by TransUnion show that consumers with an ARM, even in the near-prime and prime space, pose an increased risk.
As many credit unions begin to experience increased delinquencies and losses from near-prime and prime borrowers, near-prime and prime borrowers with ARMs are now the central focus.

To understand the increased risk associated with adjustable rate mortgages, TransUnion observed a random sample of 7 million consumers.  The population included both consumers with an ARM and consumers without an ARM. Findings included the following: 

  • Consumers with an ARM are almost four times as likely to default on a credit tradeline than consumers without an ARM
  • The likelihood for a consumer with an ARM to default on a credit tradeline was higher than a consumer without an ARM, across VantageScore® ranges
  • Risk further increases once an ARM reaches its initial reset period
  • The likelihood for a consumer with an ARM to default on a credit tradeline increases once their ARM resets, across VantageScore ranges

What should you do to better understand and mitigate the risk associated with your members with an ARM?

  • Identify members that have an ARM with another lender
  • Assess the risk and understand the opportunities associated with members that have an ARM 
  • Take action to mitigate risk, reduce losses and proactively work with members that have an ARM that will reset

Here are three high-level strategies that can be implemented to better serve your members: 

  1. After identifying members with an ARM, proactively reach out to those with an upcoming reset to educate them on the potential impact of their reset and the financial challenges that they may face. Work with the member on repayment options in advance of the ARM reset. 
  1. Take action using ARM data to reduce delinquencies and losses to protect the best interests of individual members and the overall assets of credit union members.  These actions may include adjusting credit lines, repricing products to account for increased risk or making more informed approve / decline decisions at the point-of-sale.
  1. Incorporate ARM data into your acquisition strategies to understand prospective members and their exposure to an adjustable-rate mortgage prior to acquiring them as members. This can help your credit union mitigate risk before it impacts your portfolio and protect the assets that belong to members. 

Scott Keefer is a credit union major account executive in the financial services group at Chicago-based TransUnion.  He can be reached at

Ross Minervini is a senior product manager in the solution planning & development group at TransUnion. 




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Oct. 6, 2008



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