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:

  • In early January 2012, the interest rate savings for the popular 5/1 hybrid ARM compared to the 30-year fixed-rate mortgage amounted to about 1 percentage point, about the same as during January 2011.
  • There was little difference in the initial interest rate for the 1/1, 3/1 and 5/1 products. Longer-term hybrid products, such as the 7/1 and 10/1 ARMs, were also available from 63 percent and 38 percent of the survey participants, respectively. Because of the long initial fixed-rate period (seven or ten years), the initial interest rates were priced closer to the rate on a 30-year fixed-rate loan for these products.
  • Among 121 ARM lenders, 65 percent offered loans tied to constant-maturity Treasuries, down from 71 percent in 2011; the remaining offered products tied to future rates indexed to the London Interbank Offered Rate (LIBOR). With the onset of the debt crisis in the Eurozone, the 1-year LIBOR rate less the 1-year constant-maturity Treasury yield peaked over the week ending January 6 at over 1 percentage point, compared to around 0.5 percentage points over the same week in 2011. As a result, 1-year LIBOR indexed ARMs may have adjusted up or did not adjust materially down compared with Treasury-indexed ARMs. The uncertainty over LIBOR movements may have led some current borrowers to avoid LIBOR ARMs.

Contact ALTA at 202-296-3671 or communications@alta.org.