Freddie Mac Survey Finds Hybrids Shoring up ARM Market

Adjustable rate mortgages have lost
much of the popularity they enjoyed in the mid-2000s and Freddie Mac’s 28th
Annual Adjustable-Rate Mortgage Survey for 2012 found that hybrid ARMs,
especially the 5/1 hybrid are the most popular ARMs offered by lenders.

With ARM initial period rates at
historically low levels, reflecting, in part, the low levels of the Treasury
yields that are used as indexes, the survey, conducted between January 3 and
January 5, found there was, in fact, little difference in the initial interest
rate for the traditional one-year adjustable, the 3/1 hybrid and the 5/1
hybrid.  The longer-term products such as
the 7/1 and 10/1 hybrids were, because of their long initial fixed-rate period,
priced closer to the rate on a 30-year fixed rate mortgage.

The 5/1 hybrid ARM continued to be
the most popular loan product (sic) offered by lenders and nearly all of the
ARM lenders who participated in the survey offered such a loan.  Following the 5/1 in popularity were the 3/1
and the 7/1.  Less than one-half of the lenders
now offer the one-year adjustable, and only 4 percent offered a 3/3 ARM that
adjusts once every three years.  The 7/1
and 10/1 ARMs, were available from 63 percent and 38 percent of the survey
participants, respectively.

The survey found that the interest
rate savings for the 5/1 hybrid compared to the 30-year fixed-rate mortgage was
about 1 percentage point in early 2012. 
This was virtually unchanged from the savings found in the January 2011

Of the 121 ARM lenders surveyed, 65
percent offered loans tied to constant-maturity Treasuries, down from 71
percent in 2011; the remaining offered products tied to future rates indexed to
the London Interbank Offered Rate (LIBOR).  With the onset of the debt
crisis in the Eurozone, the 1-year LIBOR rate less the 1-year constant-maturity
Treasury yield peaked over the week ending January 6 at over 1 percentage
point, compared to around 0.5 percentage points over the same week in 2011. As
a result, 1-year LIBOR indexed ARMs may have adjusted up or did not adjust
materially down compared with Treasury-indexed ARMs.  The uncertainty over
LIBOR movements may have led some current borrowers to avoid LIBOR ARMs.

Frank Nothaft, vice president and
chief economist, Freddie Mac said of the survey findings, “Homebuyers have
shied away from ARMs, particularly traditional 1-year ARMs, because they are
wary of the risk and uncertainty.  Borrowers who have taken out ARMs
generally prefer hybrids, because these products include an extended initial
period where the interest rate is fixed. ARMs today are financing just over 10
percent of new home-purchase loans. In June 2004, ARMs hit a peak share of 40
percent of the home-purchase market but by early 2009, that share had fallen to
just 3 percent, according to the Federal Housing Finance Agency. We are
expecting ARMs to gradually gain back some favor with mortgage borrowers rising
to a 14 percent share of the home-purchase market in 2012.”

…(read more)

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