Freddie Mac Releases Adjustable-Rate Mortgage Survey
Thr 23rd annual Freddie Mac Adjustable Rate Mortgage Survey released last week contained few surprises. The three major findings were:
- A decline in the market share of ARMs as savings from these loans as compared to fixed rate home loans shrank
- Greater lender discounts to entice borrowers into taking out ARMs
- The increasing popularity of hybrid ARMs relative to one-year adjustables.
First-year mortgage rates on one-year ARMS rose about 0.3 percentage points over the year, while the 5-year hybrid increased 0.2 percent and the long term ARM (10/1) and 30 year rates were virtually unchanged from the same time period a year earlier.
Frank Nothaft, Freddie Mac vice president and Chief Economist, observed that as the difference between the 30-year fixed rate mortgage and the fully indexed ARM rate decreases lenders generally offer a larger initial discount on the latter, which helps lenders to maintain ARM originations.
For example, during the week ended December 21, 2006, the underlying index rates for 1-year, 5/1, 7/1, and 10/1 home loans was 4.95 percent. The margin was within two basis points plus or minus of 2.77 leading to a fully-indexed rate ranging from 7.73 to 7.75 percent. The discount offered to borrowers was 2.29 percent for the 1/1, 1.84 for the 3/1 hybrid, 1.76 for the 5/1, and 1.60 for the 10/1.
Applications for adjustable rate mortgages accounted for 25 percent of all loan applications in November 2006.
Over the 23 years of the survey the market share of ARMs has fluctuated between 11 percent in 1998 and 33 percent in 2004.
“Consumers are financially savvy and respond to changes in the relative cost of different loan products,” Nothaft said. “As ARMs became more expensive relative to fixed-rate loans during 2006, the ARM share of lending declined.”
The 5/1 hybrid ARM in which the initial interest rate remains constant for five years before adjusting and then adjusts every year thereafter continues to be one of the most popular ARMs. In 2006, 40 percent of ARMs were 5/1 hybrids.