As the 30-year fixed mortgage rate fell to a new low (6.22%) last week, analysts are expecting that fewer borrowers will move into the hybrid ARM product.

Previously, market observers said that the recent rise in the ARM share would take away supply from both the 30-year sector and the 15-year sector, with more of an impact on the 30-year product (see ASR 08/5). Analysts have also noted that there has been substantial originator selling of ARMs over the past few weeks. All these factors point to the increasing popularity of the hybrid product.

However, with 30-year fixed rates at an all-time low, the question is, "Will borrowers start moving into this product rather than into hybrids?"

Last week's Mortgage Bankers Association (MBA) Refinancing Index decreased by 5% to 4845.8 from 5097.3 the previous week. According to analysts from JPMorgan, the majority of the dip in the Index could be attributed to less ARM applications, which dropped by 12.5%.

Researchers from the firm stated that they expect a further decrease in the share of the ARM product as 30-year rates rapidly drop.

"The yield-curve flattening has continued this week, and is likely to lead to a greater decline in primary rates on fixed-rate MBS relative to hybrid rates," JPMorgan analysts wrote last Wednesday. "30-year no point mortgage rates at 6.25% and 15-year mortgage rates at 5.50% are likely to drive a large share of borrowers into fixed-rate product, and potentially reduce the high share of ARM originations, which could bode well for hybrid ARM investors."

Aside from more attractive 30-year rates, an added disincentive for moving into ARMs is reset risk, as the borrower runs the risk of increasing monthly mortgage payments following the reset period.

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