The Mortgage Bankers Association reported last week a significant jump in purchase applications, rising 5.5% and making it comparable to levels seen in 1Q04, while also reporting that the ARM share of mortgage activity increased to an all-time high of 36.6%, or 52% in terms of dollar volume. Analysts said that the figures are "an eye opener" especially considering that the MBA application numbers only reflect prime mortgages.

The unique thing about the record ARM percentage is that it is not driven by the yield curve, but this phenomenon is happening even despite a flatter curve. Analysts said that the rise in ARMs is now a product of rising home prices relative to income, making housing affordability an issue that has caused homeowners to ride down the yield curve. They warn, however, that the shift into ARMs has caused homeowners, including investor property owners, to take on more rate risk, which could potentially result in a serious credit crunch as ARMs reset over longer-term fixed rates.

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