![](media/image1.emf){width="1.0368055555555555in"
height="1.0305555555555554in"}**[DEPARTMENT OF VETERANS
AFFAIRS]{.smallcaps}**

**Regional Office**

**Norris Cotton Federal Building**

**275 Chestnut Street**

**Manchester NH 03101**

**September 9, 2003**

In Reply Refer To: 373/26

**[Regional Loan Center Release No. 03-07]{.underline}**

TO: LENDERS AND SERVICERS

SUBJECT: HYBRID ADJUSTABLE RATE MORTGAGES

1\. [PURPOSE]{.underline}: The Veterans Benefits Act of 2002 authorizes
VA to carry out a demonstration project to guarantee Hybrid Adjustable
Rate Mortgages (Hybrid ARMs) during Fiscal Years 2004 and 2005. This
circular provides information about implementing the project.

2\. [EFFECTIVE DATE]{.underline}: PLEASE NOTE that VA is authorized to
guarantee Hybrid ARM loans that close **on or after October 1, 2003.**
Lenders should not close VA Hybrid ARM loans **[prior]{.underline}** to
that date. This circular is being released prior to that date so lenders
can make any necessary modifications to their systems and/or procedures.

3\. [INTEREST RATES]{.underline}. Hybrid ARMs will specify an initial
rate of interest that is fixed for a period of at least 3 years. After
that the rate can be adjusted annually. Annual adjustments are limited
to 1 percent, and the maximum increase in the interest rate over the
life of the loan is capped at 5 percent.

a.  [Interest Rate Index]{.underline}. The index for VA Hybrid ARMs will
    be the same as that used by HUD which is the weekly average yield on
    U.S. Treasury securities adjusted to a constant maturity of 1 year.
    (This information is found in the Federal Reserve Bulletin and made
    available by the Federal Reserve Board in Statistical Release H.15.)

b.  [Margins]{.underline}. VA will not dictate what margin lenders must
    use when processing Hybrid ARM loans. It's expected that market
    forces will determine what the appropriate margin should be.

c.  [Frequency of Interest Rate Changes]{.underline}. Interest rate
    adjustments must occur on an annual basis, except that the first
    adjustment may occur no sooner that 36 months from the date of the
    borrower's first mortgage payment.

4\. [PRE-LOAN DISCLOSURE]{.underline}. The lender is required to explain
the nature of the obligation to the borrower in writing at the time of
loan application. The borrower must certify that he or she fully
understands the obligation. A copy of the signed certification should be
retained as part of the loan origination package. The lender disclosure
must include:

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-   The fact that the mortgage interest rate may change, and an
    explanation of how changes correspond to changes in the interest
    rate index;

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-   Identification of the interest rate index, its source of publication
    and availability;

-   The frequency (i.e. annually ) with which interest rate levels and
    monthly payments will be adjusted, and the length of the interval
    (36 months) that will precede the initial adjustment;

-   A hypothetical monthly payment schedule that displays the maximum
    potential increases in monthly payments to the borrower over the
    first 5 years of the mortgage, subject to the provisions of the
    mortgage instrument.

5\. [UNDERWRITING]{.underline}: Hybrid ARMs will be underwritten at the
note rate. Because the interest rate on VA's Hybrid ARM loan will remain
fixed for at least 3 years, there is no need to underwrite at a higher
rate in anticipation of a possible rate increase within 12 months, which
would be possible under the traditional 1 year ARM.

6\. [TEMPORARY BUYDOWNS]{.underline}. Lenders may not use temporary
buydowns in

connection with Hybrid ARMs.

7\. [LOAN ASSUMPTIONS]{.underline}. For VA Hybrid ARM loans that are
later assumed, the

lender/holder must provide the transferee with the same disclosure noted
in paragraph 4.

8\. [VA FORM 26-0286, VA LOAN SUMMARY SHEET]{.underline}. This form has
been

revised to accommodate the new Hybrid ARM loan. It can be downloaded at
the form link on the VA Loan Guaranty Service web page
(www.vba.va.gov/pubs/homeloanforms.htm).

If we can assist you with any question, please contact our Loan
Production Section at (800) 827-6311, option 7, or send an e-mail to:
"nh_lp@vba.va.gov". Your continued support in helping us provide quality
housing assistance for veterans and their families is appreciated.

KEITH C. BOERNER

Loan Guaranty Officer