Freddie Mac has released the results of its 25th Annual Adjustable-Rate Mortgage (ARM) Survey of prime loans. The survey, conducted Jan. 5-9, found large premiums for initial interest rates on Treasury-indexed ARMs; a continued decline in ARM share of overall lending as the initial interest-rate savings relative to fixed-rate loans disappeared; and a very thin market for traditional one-year, Treasury-indexed ARMs.
‘Our survey found that starting rates for conforming one-year ARMs averaged 1.76 percentage points above their fully indexed rate – the largest rate premium observed since Freddie Mac began collecting ARM data in 1984," says Frank Nothaft, Freddie Mac's vice president and chief economist. "Further, rates on 30-year fixed-rate mortgages had fallen to 50-year lows and were near or below initial rates on ARM products. As a consequence, by December, the ARM share of loan applications had fallen to three percent – the lowest recorded in our survey."
Over the course of 2008, the Federal Reserve cut its target for the overnight bank-lending rate, the federal funds rate, by more than four percentage points to an unprecedented low range of 0% to 0.25%, while annually adjusting (1/1) conforming ARM rates only fell roughly 0.6 percentage points. Interest rates for 30-year fixed-rate mortgages, on the other hand, fell more sharply to end the year at record lows.
Interest rates between 30-year fixed-rate mortgages and 1/1 conforming ARMs narrowed to nearly match one another, which only occurred once before in the survey in December 2000, when the Treasury yield curve inverted. All other Treasury-indexed ARM products surveyed – jumbo, Federal Housing Administration and hybrid – had average initial rates above those for 30-year fixed-rate mortgages for the first time in Freddie Mac's Annual ARM Survey.
Only 21% of lenders quoted a conforming one-year ARM, the smallest share in 25 years. Hybrid ARMs, which have an extended initial fixed-rate period before adjusting annually, are the most common ARMs available.
"The most popular products were the 3/1 and 5/1 ARMs, which have an initial reset period of three and five years, respectively, and then adjust annually thereafter," says Nothaft. "About 90 percent of lenders offered the 5/1 hybrid; this product accounted for most of the conventional, prime ARMs originated in 2008."
SOURCE: Freddie Mac