McLean, VA -- Freddie Mac today released the results of its 25th Annual Adjustable-Rate Mortgage (ARM) Survey of prime loans. The survey, conducted January 5 to January 9, found:
Large premiums for initial interest rates on Treasury-indexed ARMs;
Continued decline in ARM share of overall lending as the initial interest-rate savings relative to fixed-rate loans disappeared;
Very thin market for traditional 1-year, Treasury-indexed ARMs.
"Our survey found that starting rates for conforming 1-year ARMs averaged 1.76 percentage points above their fully-indexed rate, the largest rate premium observed since Freddie Mac began collecting ARM data in 1984," said Frank Nothaft, Freddie Mac vice president and chief economist. "Further, rates on 30-year fixed-rate mortgages had fallen to 50-year lows and were near or below initial rates on ARM products. As a consequence, by December the ARM share of loan applications had fallen to 3 percent, the lowest recorded in our survey. With low consumer interest in ARMs, fewer lenders offered a wide array of ARM products. The traditional annually adjusting conforming ARM was found at one-in-five lenders this year, also the lowest share recorded in the quarter century of the survey."
Over the course of 2008, the Federal Reserve cut its target for the overnight bank-lending rate, the federal funds rate, by more than four percentage points to an unprecedented low range of 0-0.25 percent, while annually adjusting (1/1) conforming ARM rates only fell roughly 0.6 percentage points. Interest rates for 30-year fixed-rate mortgages, on the other hand, fell more sharply to end the year at record lows. Interest rates between 30-year fixed-rate mortgages and 1/1 conforming ARMs narrowed to nearly match one another, which only occurred once before in the survey in December 2000 when the Treasury yield curve inverted. All other Treasury-indexed ARM products surveyed (jumbo, FHA and hybrid) had average initial rates above those for 30-year fixed-rate mortgages for the first time in Freddie Mac's Annual ARM Survey.
"A large volume of investment funds flowed into Treasury bills and notes over the past few months, pushing yields on Treasury bills and notes down to levels not seen in more than 50 years by year-end," observed Nothaft. "Because ARMs generally have interest-rate or payment caps that limit payment adjustment, initial rates on ARMs did not decline as much as yields on one- or three-year Treasury securities. Further, heightened uncertainty over future interest-rate levels and expectations of home-value declines in many markets likely added to the premium above fully-indexed rates across all ARM products."
Only 21 percent of lenders quoted a conforming 1-year ARM, the smallest share in 25 years and compared to 96 percent of lenders offering the product in 1999. Hybrid ARMs, which have an extended initial fixed-rate period before adjusting annually, are the most common ARMs available. "The most popular products were the 3/1 and 5/1 ARMs, which have an initial reset period of three and five years, respectively, and then adjust annually thereafter. About 90 percent of lenders offered the 5/1 hybrid; this product accounted for most of the conventional, prime ARMs originated in 2008," said Nothaft.
Consumers, too, shied away from ARMs in 2008. In December 2008, only 3 percent of applications were for ARMs, compared to peak months in 2005, 2004, 2000 and 1995 of around 36 percent, as found in Freddie Mac's Primary Mortgage Market Survey®. Even homeowners who refinanced avoided ARMs. According to Freddie Mac's Refinance Product Transition Report, 94 percent of conventional prime borrowers who originally had a 1-year ARM chose a new conforming fixed-rate loan when they refinanced in the third quarter of 2008. Similarly, approximately 82 percent of borrowers with hybrid ARMs refinanced into fixed-rate mortgages.
Notes: The sample is limited to ARMs indexed to either the 1-year or the 3-year constant maturity Treasury (CMT) yields. Data were collected from 113 ARM lenders during the week ending January 9, 2009. The 3-year, 5-year, 7-year and 10-year ARM results are limited to conforming loans of $417,000 or less. The initial discount is based on the value of the weekly average 1-year or 3-year CMT yield for the comparable week ending January 9, 2009. The "Fixed-Adjustable Rate Spread" is the average interest rate on a 30-year conventional conforming ($417,000 or less) fixed-rate mortgage less the initial rate on the ARM. Using Freddie Mac's Primary Mortgage Market Survey® for the week ending January 9, 2009, the average interest rate on a conventional, conforming, 30-year fixed-rate mortgage was 5.01 percent with average fees and points of 0.6 percentage points.
Freddie Mac was established by Congress in 1970 to provide liquidity, stability and affordability to the nation's residential mortgage markets. Freddie Mac supports communities across the nation by providing mortgage capital to lenders. Over the years, Freddie Mac has made home possible for one in six homebuyers and more than five million renters.