During the financial crisis, consumers stopped seeking adjustable-rate mortgages, which has perplexed economists at the Federal Reserve Bank of New York.

In the December issue of its publication, Current Issues in Economics and Finance, a group of the bank's economists posed the question: Why is the market share of adjustable-rate mortgages so low?

The economists said several hypotheses have been offered to explain homeowners' relative preference for fixed-rate mortgages during the downturn. ARMs' market share has fallen near a record low of less than 10% of all residential originations, they noted.

A possible explanation is the collapse of the secondary market for subprime mortgages, which was dominated by ARMs. Without an outlet for selling subprime loans, lenders would no longer make them.

Another hypothesis is that households have become more risk-averse amid "reports of 'payment shock' associated with interest resets on ARMs."

A third conceivable interpretation is that the spread between fixed and adjustable rates had something to do with it.

The economists did a statistical analysis and found that "the low ARM share is largely consistent with long-run historical patterns … — namely, that households tend to prefer fixed-rate mortgages when long-term interest rates are low relative to recent short-term rates."

Certainly, other factors related to the financial crisis had some effect, they said. But one factor that appears not to have contributed to the drop in ARMs' share was the Fed's mortgage-backed security purchase program, which helped drive down fixed rates.

The ARM share "was already at historic lows before the announcement of the program in November 2008," the economists wrote.

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