For Third Year, Most Adjustable-Rate Mortgages Have Initial Rate Above Fully-Indexed Rate
McLean, VA – January 18, 2011 – (RealEstateRama) — Freddie Mac (OTC: FMCC) today released the results of its 27th Annual Adjustable-Rate Mortgage (ARM) Survey of prime loan offerings, which was conducted January 3 to January 5 of this year.
News Facts
- For the third consecutive year, lenders quoted an initial rate that was above the fully-indexed rate on most ARM products, although the premiums are less than those reported in the 26th Annual ARM Survey. This means that even if short-term Treasury rates remain where they are, the first-rate adjustment would actually lower a homeowner’s mortgage payment.
- In early January 2011, the interest rate savings between the initial start rate for traditional 1-year ARMs and 30-year fixed loans amounted to about 1.5 percentage points, compared to 0.8 percentage points in January 2010.
- 5/1 hybrid ARMs continue to be the most popular loan product offered by lenders. Nearly all of the ARM lenders participating in the survey offered such a loan. The second most popular loan among lenders was the 3/1 hybrid ARM; more than seven in 10 lenders offered this product. Only 9 percent of lenders offered a 3/3 ARM loan, which adjusts once every three years.
- The rate savings for hybrid ARMs relative to a 30-year fixed-rate loan declines with longer initial fixed periods before the first adjustment, averaging just 1.0 percentage points for 5/1 hybrid ARMs in the current survey. Longer-term hybrid products, such as the 7/1 and 10/1 ARMs, were also available from lenders, consisting of 64 percent and 23 percent of the survey participants, respectively. Because of the long initial fixed-rate period (seven or ten years), the initial interest rates were priced close to the rate on a 30-year fixed-rate loan for these products.
- Among 112 ARM lenders, 71 percent offered loans tied to constant-maturity Treasury yields; the remaining offered products with future rates indexed to the London Interbank Offered Rate (LIBOR). With the onset of the financial crisis, the 1-year LIBOR interest rate less the 1-year constant maturity Treasury yield peaked at just over 3 percentage points in October 2008, and LIBOR-indexed ARMs that adjusted at that time 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. Currently, the interest rate difference stands at around 0.5 percentage point between the two indexes.
QuotesAttributed to Frank Nothaft, vice president and chief economist, Freddie Mac.
- “Homebuyers have shied away from ARMs because they are wary of the risks. The potential for much larger payments if future interest rates are significantly higher and the high delinquency rates borrowers have experienced on ARMs over the past couple of years have led consumers to prefer fixed-rate loans instead of ARMs. In addition, fixed-rate loans currently carry extraordinarily low rates, and initial ARM rates are only slightly lower, making fixed-rate product more attractive.
- “ARMs today are financing just 7 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 an average 9 percent share of the home-purchase market in 2011.”
27th Annual Adjustable-Rate Mortgage Survey Treasury-Indexed ARM Features in January 2011
| 1-Year ARMs | 3-Year ARMs | Longer Initial-Period Hybrid ARMs | Conforming | Jumbo | 3/1 | 3/3 | 5/1 | 7/1 | 10/1 |
| Loan Terms | – – – P e r c e n t a g e P o i n t s – – – | ||||||
| Underlying Index Rate | 0.29 | 0.29 | 0.29 | 1.08 | 0.29 | 0.29 | 0.29 |
| Margin | 2.76 | 2.76 | 2.76 | 2.79 | 2.75 | 2.74 | 2.76 |
| Fully-Indexed Rate | 3.05 | 3.05 | 3.05 | 3.87 | 3.04 | 3.03 | 3.05 |
| Initial Year’s Discount | -0.19 | -0.34 | -0.36 | 0.16 | -0.71 | -1.09 | -1.48 |
| Initial Interest Rate | 3.24 | 3.39 | 3.41 | 3.71 | 3.75 | 4.12 | 4.53 |
| Fees and Points | 0.6 | 0.6 | 0.7 | 0.6 | 0.7 | 0.6 | 0.7 |
| Fixed-Adjustable Rate Spread | 1.53 | 1.38 | 1.36 | 1.06 | 1.02 | 0.65 | 0.24 |
| Product Availability (percent of lenders) |
45 | 26 | 71 | 9 | 96 | 64 | 23 |
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 80 ARM lenders during the week ending January 6, 2011. 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 6, 2011. 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 6, 2011, the average interest rate on a conventional, conforming, 30-year fixed-rate mortgage was 4.77 percent with average fees and points of 0.8 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.
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