With the adjustable-rate mortgage (ARM) share in last week's Mortgage Banker's Association (MBA) Refinancing Index declining to 13.4% from 16.5%, analysts are starting to call for a reversal of the ARM effect.

A JPMorgan Securities report released last Wednesday said the ARM share of refinancings - though remaining high at the 22.7% level - dropped again in terms of dollar volume. Analysts from the firm expect the ARM share to settle at the 15% to 20% level.

Researchers at Countrywide Securities Corp. noted that the flatter Treasury curve, wider ARM spreads (due to supply concerns) as well as the new lows seen in fixed-rate mortgages have made fixed-rate loans look more attractive versus the ARM product. CSC added that this may impact prepayment behavior in both the fixed-rate and ARM sectors.

Aside from these factors, Countrywide says that ARM lending rates tend to rely more on the amount of points paid by the borrower compared to fixed-rate mortgages. This is largely because the pricing of ARM servicing is worse than the pricing of the servicing of fixed-rate loans. This makes lenders place more value on the up-front payment of points in the ARM market.

CSC's report also noted that the decline of fixed rates to all-time lows not only affected borrower refinancing options in terms of refinancing out of fixed-rate, but should also generate movement from the ARM product to fixed. The researchers explained that, as fixed mortgage rates are now in the low 6% level, borrowers can refinance into another adjustable-rate, dropping their rate by roughly 50 basis points. Borrowers could also refinance into a 30-year fixed-rate loan and lock in a low rate for the term of the mortgage, seizing the chance to lock in the attractive fixed rates instead of having to deal with a reset in the future.

Analysts from the firm projected the impact of this behavior if it starts to happen in earnest, noting that an increase in prepayments speeds for hybrid ARMs could occur, specifically with 2001-production vintages more vulnerable to an acceleration in speeds. There also might be a slowdown in ARM production and an equivalent increase in fixed rate issuance. This could lead to a potential moderation in prepayment speeds for conventional 6s.

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