PenFed Services A Member-Friendly 5/5 ARM

With PenFed’s 5/5 adjustable rate mortgage, members don’t have to worry about payments changing annually.


The economy shows signs of recovering, but many Americans are still intimidated by the housing market.

To add some predictability to adjustable rate mortgages, Pentagon Federal Credit Union ($15.1B, Alexandria, VA) offers its 5/5 adjustable rate mortgage that meets asset liability needs and works for consumers in a volatile rate environment.

Community banks, thrifts, and credit unions account for only 20% of the mortgage market while the rest is controlled by the top five national financial institutions, says James Schenck, executive vice president of real estate with PenFed. But, lately, banks have been more reluctant to lend for homes, giving smaller institutions a greater opportunity in mortgages.

PenFed executives are focused on staying competitive and taking mortgages market share from the bank, Schenck says in a recent webinar, hosted by Callahan & Associates.

PenFed’s real estate loan portfolio grew 5.12% to $9.3 billion in the fourth quarter of 2011 from $8.8 billion in the fourth quarter of 2010, according to Callahan & Associates’ Peer-to-Peer data. About 62.8% of PenFed’s mortgages, which comprised 69% of its total loan portfolio, were 5/5 ARMs, as of December 2011.

General Real Estate Breakdown
Data as of December 31, 2011
Callahan & Associates' General Real Estate Breakdown
Source: Callahan & Associates Peer-to-Peer Software.

With rates at record low levels, homebuyers may be afraid to take on an adjustable rate mortgage that could increase significantly in upcoming years. But the 5/5 ARM helps ease those fears by adjusting on a five-year cycle instead of annually. Each adjustment caps at 2%. For the life of the mortgage, PenFed has set the adjustment rate cap at 5%. That means if a mortgage’s initial rate was 3.5% — where PenFed’s loans were in 2011 — the highest rate the borrower would ever pay would be 8.5%.

“That is a consumer-friendly product, but provides the institution with some interest rate protection,” Schenck says. PenFed services the loans even if they originated through another broker or with a partner credit union, and members say they appreciate having a single point of contact.

PenFed also offers a 5/1 ARM, that adjusts every year after the first five years, in its suite of mortgage products. The 5/1 ARM can offer members a lower rate, but that rate could increase by 5% on the first adjustment. With the 5/5 ARM, payments don’t change as frequently, while the homeowners build equity.

Delinquency rates on loans more than 60 day past due at PenFed improved to 0.44% in the fourth quarter from 0.58% in the quarter prior as the total delinquent loans dropped nearly 21% to $59.7 billion from $75.6 billion. The national delinquency average is 1.61%.

“We price our rate aggressively because we think it’s a good product,” Schenck says. “Compared to our alternative of keeping it [money] in overnights or some of the other authorized investments, it’s better for us to put it out in a mortgage.”