Despite the flatter curve, ARM production has not and is not expected to decline in the near term, analysts said. In fact, the Mortgage Bankers Association reported last week that ARM share of applications is still at a historically high 46% by dollar volume.

Citigroup Global Markets reports that there are three primary factors buttressing ARM supply: teaser rates, home price appreciation and borrower comfort with ARM product. Lenders have increased the initial rate discounts, or teaser rates, on ARM products just to maintain mortgage pipeline volumes, according to the report. Additionally, borrowers have switched from fixed rate to ARMs over a one-year period through 3Q04 as home prices rose significantly by 12.4%. Borrowers have also become more comfortable with the reset risk in ARMs.

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