Hybrid ARMs Dominate Product Offerings and Originations
|January 19, 2012|
ARM initial-period rates are at historically low levels and hybrid ARMs remain the most common adjustable-rate product in the market, according to Freddie Mac’s Annual Adjustable-Rate Mortgage Survey of prime loan offerings.
Initial-period rates on ARMs were at the lowest levels recorded in the 28-year history of the ARM pricing survey, reflecting, in part, the low levels of the Treasury yields that are used as indexes.
"Homebuyers have shied away from ARMs, particularly traditional 1-year ARMs, because they are wary of the risk and uncertainty, said Frank Nothaft, vice president and chief economist, Freddie Mac. “The potential for much larger payments if future shorter-term interest rates are significantly higher and the high delinquency rates that borrowers have experienced with ARMs in recent years have led consumers to prefer fixed-rate loans over ARMs. In addition, fixed-rate loans currently are at near historic lows, and initial ARM rates are only slightly lower than fixed-rate loans.
The 5/1 hybrid ARM continued to be the most popular loan product offered by lenders, according to the survey. Nearly all of the ARM lenders participating in the survey offered such a loan. The next most popular products were the 3/1 and the 7/1 hybrid ARMs. Less than one-half of lenders offered the 1-year adjustable, and only 4 percent of lenders offered a 3/3 ARM, which adjusts once every three years.
"Borrowers who have taken out ARMs generally prefer hybrids, because these products include an extended initial period where the interest rate is fixed,” Nothaft said. “ARMs today are financing just over 10 percent of new home-purchase loans. In June 2004, ARMs hit a peak share of 40 percent of the home-purchase market but by early 2009, that share had fallen to just 3 percent, according to the Federal Housing Finance Agency. We are expecting ARMs to gradually gain back some favor with mortgage borrowers rising to a 14 percent share of the home-purchase market in 2012."
Additional Survey Results: