5/1 Hybrids Among Most Popular ARM Product

Lenders that offer adjustable-rate mortgages (ARMs) find that hybrids are far more popular with borrowers than annually adjusting ARMs, according to Freddie Mac's 26th Annual Adjustable-Rate Mortgage survey of prime loan offerings.

‘While ARM lending has been limited, those consumers who prefer an ARM generally have many lenders and products to choose from,’ says Frank Nothaft, Freddie Mac's vice president and chief economist. ‘The most offered product in the survey was the 5/1 ARM, where more than four out of five ARM lenders quoted rates. The 5/1 hybrid has a fixed rate for five years and then adjusts annually afterwards.’

With overall inflation and interest rates on fixed-rate loans very low, the ARM share of purchase-money conventional loans averaged just 3% in 2009 – the smallest annual share since 1982, when Freddie Mac's survey began.

Traditionally, the one-year ARM, which adjusts every year, dominated the ARM market. As early as 1997, all ARM lenders offered a conforming one-year ARM.

Last year, however, only 23% of ARM lenders offered this product (up slightly from 21% in 2008). In addition, lenders offering a similar jumbo ARM fell from 35% in 2008 to 23% in 2009, and just a couple of lenders quoted a one-year ARM with Federal Housing Administration (FHA) insurance; only 1% of FHA loans issued were ARMs during its fiscal year ending Sept. 30, 2009.

After the 5/1 hybrid, the next most commonly found product in the ARM market was the 3/1 hybrid, which was offered by three out of five lenders. Another three-year option is the 3/3 ARM, which adjusts every third year and is indexed to the three-year Treasury yield, but only 7% of lenders offered it, the survey found.

Longer-term hybrid products, such as the 7/1 and 10/1 ARMs, were also available from 55% and 24% of the survey participants, respectively. Because of the long initial fixed-rate period (7 or 10 years), the initial interest rates were priced close to or slightly above the rate on a 30-year fixed-rate loan. In general, the initial interest rate rises with the length of the initial fixed-period across the array of hybrid ARM products.

Freddie Mac collected the data from 117 ARM lenders during the week ending Jan. 7, 2010. The three-, five-, seven- and 10-year ARM results are limited to conforming loans for prime borrowers.

SOURCE: Freddie Mac


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