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Annual Freddie ARM Survey Sees Drop in Prime ARM Discounting

Freddie Mac released its annual ARM survey of prime loans for 2007 last week. Based on the survey, the GSE reported a sharp decline in interest-rate discounting of prime ARM loans as well as tighter credit underwriting resulting from the disruptions in the capital markets that started in August.

For example, the initial-rate discount a year ago on 3/1 and 5/1 hybrid loans was about 1.8 percentage points, said Freddie Mac Chief Economist Frank Nothaft. But, in the firm's latest survey, the rate discount had virtually disappeared for these products. For 3/1s, the agency's survey reported the initial year's discount at 0.17 and 0.03 for 5/1s.

The survey also found that starting rates for ARMs were either similar or above rates seen a year earlier despite Fed Funds being reduced to 4.25% from 5.25% in 2006. Initial rates on 3/1 and 5/1 ARMs in the 2007 survey were 5.83% and 6%, respectively, compared with 5.88% and 5.96% in 2006.

On the other hand, the fully indexed rates have fallen to their lowest level in three years, Freddie Mac reported. This has caused an erosion in the initial-rate discount that had been prevalent in the market during 2005 and 2006, the GSE said. The fully indexed rates recorded for 2007 for 3/1s and 5/1s were 6% and 6.03% respectively, versus 7.72% for both in 2006's survey. Margins averaged 275 basis points, according to the survey, which is similar to the previous year.

The fixed-adjustable rate spread was not too different in 2007 versus 2006. For 3/1 and 5/1 hybrid ARMs, the spread was 31 basis points and 14 basis points, respectively. This is compared with 25 basis points for 3/1s and 17 basis points for 5/1s previously.

The survey also found that 5/1 and 3/1 ARMs remain the most widely offered among lenders. Ninety-three percent of lenders offered 5/1s and 78% offered 3/1s, up from 2006's 84% and 69%, respectively. According to the survey, 3/3s are the least popular product with only 17% of lenders offering them, although this percentage is up from 4% in 2006.

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