Freddie Mac said today that initial
rates on adjustable rate mortgages (ARMs) are at the lowest recorded levels in
the 29 year history of its ARM Survey. The
most recent edition of that survey was conducted from January 7 to 10 and also
showed the hybrid ARMs remain the most common of the adjustable rate products
available in the market.
Over the last several years the Weekly
Mortgage Application Survey conducted by the Mortgage Bankers Association has
consistently pegged the market share of ARMs at 3 to 4 percent. Freddie Mac says that hybrid ARMS, those
adjustable rate mortgages with an extended initial fixed-rate period of three,
five, seven, or ten years after which they adjust annually, are the most
popular loan product among ARMs. The 5/1
hybrid is the most common, offered by 90 percent of lenders surveyed. Second is the 3/1, offered by 68
percent. Least popular is the 3/3 where
the rate adjusts every three years for the life of the loan.
the time of the survey the interest rate savings for the 5/1 hybrid ARM with a
30-year term compared to the 30-year fixed-rate mortgage (FRM) was about 0.65
percentage points or about $90 less in the first five years of a $250,000 loan.
Freddie Mac credits the Federal Reserve's
accommodative monetary policy with keeping short-term interest rates very low
and, over the past year, helping to lower longer term rates.
Compared with last year, the largest
declines in initial interest rates among hybrid products occurred with the 7/1
and 10/1 hybrids. For these products with long initial fixed-rate periods, rates
declined by 0.32 and 0.57 percentage points, respectively. Again this reflects the effects of the
Federal Reserve's latest round of quantitative easing.
Among the 131 ARM lenders surveyed,
69 percent offered loans tied to Treasury yields, up from 65 percent in 2012;
the remaining offered products tied to the London Interbank Offered Rate
(LIBOR). LIBOR-indexed ARMs generally had a lower margin (about 0.5
percentage points lower) than Treasury-indexed ARMs, a similar initial interest
rate, but a higher fully indexed rate. The higher fully indexed rate
reflects the fact that one-year LIBOR yields averaged 0.7 percentage points
above one-year Treasury yields in early January.
Frank Nothaft, Freddie Mac's vice
president and chief economist, said of the survey results, "Homebuyers
have shied away from ARMs, particularly 1-year ARMs, because they are wary of
the risk and uncertainty. The potential for much larger payments if,
interest rates are significantly higher in the future, and the high delinquency
rates borrowers have experienced on ARMs in recent years, have led consumers to
prefer fixed-rate loans instead of ARMs. In addition, fixed-rate loans
currently carry rates near historic lows, and only a small amount above initial
rates on ARMs.
"Borrowers who have taken out
ARMs generally prefer hybrids, because these products include an extended
initial period where the interest rate is fixed. During 2012, ARMs comprised
one-in-ten new home-purchase loans, according to the Federal Housing Finance
Agency. We are expecting ARMs to gradually gain back some favor with mortgage
borrowers, with the ARM share rising to 12 percent of the home-purchase market