The Wall Street Journal-20080116-Adjustable-Rate Mortgages Slip
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Adjustable-Rate Mortgages Slip
Adjustable-rate mortgages are declining in popularity these days, and for good reason: They offer less financial advantage to borrowers, according to Freddie Mac's annual ARM survey.
The interest-rate savings that ARMs once offered relative to fixed- rate mortgages is shrinking, according to the survey. Also, the difference between an ARM's initial rate and the rate to which the loan eventually adjusts has decreased -- an erosion of the discounts that were prevalent in 2005 and 2006.
"Disruptions in the capital markets beginning in August and an increase in delinquencies on ARM product" have led to a sharp decline in interest-rate discounting and a tightening of credit underwriting on ARMs, said Frank Nothaft, Freddie Mac vice president and chief economist, in a news release.
"A year ago, the initial-rate discount on the popular 3/1 and 5/1 hybrid products was about 1.8 percentage points. In our latest survey, the rate discount had virtually disappeared on these products," he said.
Between Dec. 17 and 21, starter rates for ARMs were close to or higher than the rates a year earlier -- even though the Federal Reserve had lowered its federal funds target rate to 4.25% from 5.25% since the last ARM survey. At the same time, the fully-indexed rates -- which borrowers pay after the introductory period ends -- fell to their lowest levels in three years, partly in response to the Fed rate cuts.
ARMs accounted for 17% of loan applications in October 2007 -- the lowest share since June 2003, when interest rates on fixed-rate loans were near a 45-year low and refinance activity was near a peak, according to Freddie Mac. The share of ARMs has fluctuated between an annual low of 11% in 1998 and a high of 33% in 2004, since the survey began in 1995.
Over the year, delinquency rates on prime ARMs rose well above the delinquency rates on prime fixed-rate loans, Mr. Nothaft said, citing Mortgage Bankers Association figures.
The MBA said the serious delinquency rate on prime ARMs was 3.1%, compared with 0.8% for prime fixed-rate loans as of Sept. 30. The delinquency rate on prime ARMs was 1.1% one year earlier, Mr. Nothaft said.
