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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