Freddie Mac released its annual ARM survey last week. As in the last survey, the agency reported that lenders were offering bigger discounts for introductory ARM rates and noted the popularity of hybrid ARMs versus one-year ARMs. In addition, Freddie Mac also looked at the decline in ARM share of total lending as the interest savings versus fixed-rate loans has shrunk.
The first half of 2006 continued to see increases particularly in short-term rates as the Federal Open Market Committee continued to raise the Fed Funds rate. In order to stimulate ARM interest, lenders made greater use of initial-rate discounts. According to Freddie Mac, the discount at the end of 2006 for conventional, conforming one-year Treasury-indexed ARMs averaged 2.3 percentage points, up from 1.9 percentage points at the end of 2005. Analysts from the GSE pointed out that the last time initial rate discounts were higher was in 1997.Over the 23-year history of the survey, initial discounts on one-year ARMs have averaged 1.7 percentage points.
Freddie Mac's survey also found that in 2006, two in five ARMs were 5/1 hybrids. In 1999, they were in traditional one-year adjustables. The firm's Chief Economist Frank Nothaft pointed out that the hybrid offered the borrower the comfort of knowing the interest rate was fixed for the first five-years. In addition, borrowers' intention is to have the loan for five years or less, so the large jump on the reset date is not necessarily a consideration for them.
Also noted was that over 80% of lenders offered 5/1 hybrids -similar to the last survey. On the other hand, only 52% of lenders offered one-year ARMs, which was down from 56% in 2005. The agency said this was the lowest share in that program in the history of this survey.
The flattening of the yield curve has taken its toll on ARM share as the fixed-adjustable rate spread deteriorated further. For example, in December 2006, the spread for a one-year conforming loan was 69 basis points versus 89 basis points in 2005 and 158 basis points in 2004. The GSE reported that ARMs accounted for 25% of loan applications in November 2006 versus 32% in November 2005. Since 1995, ARM share has fluctuated between a low of 11% in 1998 to a high of 33% in 2004, Freddie Mac stated in the report.
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