Freddie Mac's Annual ARM Survey Results Confirm Increased Popularity of Hybrid ARMs

MC LEAN, Va. - Freddie Mac recently released the results of its 22nd Annual Adjustable-Rate Mortgage Survey, and the findings confirm what mortgage lending experts have been saying for awhile- hybrid ARMs with an initial "fixed-rate" period of more than one year, have increased in popularity more than one-year ARMs. Within that "hybrid" product type, says Freddie Mac, ARMs with an initial fixed-rate period of five years - "5/1" ARMs - have been dominant choice of consumers. Top line findings of the survey based on data collected Dec. 19-22 found greater lender discounts for introductory ARM rates; smaller interest-payment savings for ARMs compared to fixed-rate loans; and increasing popularity of hybrid ARMs compared to one-year adjustables. Frank Nothaft, vice president and chief economist for Freddie Mac, offered that the Federal Reserve's decision at each of their meetings in 2005 to raise short-term interest rates which consequently increased their federal funds target from 2.25% to 4.25%, also contributed to a rise in short-term interest rates relative to long-term rates. This phenomenon is reflected in mortgage pricing as well, Nothaft said. "When the interest-rate difference between a 30-year fixed-rate mortgage and the fully-indexed ARM rate decreases, lenders generally offer a larger initial rate discount on the ARM. The larger initial discounts increase the initial rate benefit of an ARM compared with fixed-rate loans, helping lenders to maintain ARM originations." Compared with Freddie Mac's previous Annual ARM survey, the interest rate savings on ARMs are now smaller, even with the initial rate discounts that are offered by lenders. Nothaft said in 2005, two-in-five ARMs were 5/1 hybrids.