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Freddie Mac ARM Survey – Hybrid ARMs Remain Popular Loans Among Borrowers

businessinsider.com | February 2, 2014

By Elizabeth Atkins

On Tuesday, mortgage buyer Freddie Mac released the results of its latest Annual Adjustable Rate Mortgage Survey, its 30th such study covering prime loan products offered to consumers. The study was conducted from January 6 to January 10, and among other key takeaways, ARM initial-period rates are higher than they were in the previous year, but nonetheless close to historical lows.

The survey was chock full of interesting takeaways apart from the key ones mentioned above. According to the study results, hybrid ARM products remained the most popular such product offered by financial institutions and chosen by consumers. One key feature of a hybrid ARM is an extended initial period wherein rates are fixed; these usually range between three to ten years. After this initial period, rates would adjust on a yearly basis throughout the life of the loan. The most popular hybrid ARM was the 5/1 hybrid ARM – this means rates are fixed for the first five years, before resetting annually throughout the LOL. This product was followed by 3/1, 7/1, and 10/1 ARMs.

Conversely, products wherein the frequency of rate adjustments would be fixed for the LOL were not as popular nor as common in the ARM market. Examples of such products would be the 3/3 ARM, where rates adjust once every three years, as well as the 5/5 ARM, with rates getting recalibrated every five years.

Talking about ARM interest rates, the average rate savings for a 5/1 Hybrid ARM with a 30-year term as compared to a conventional 30-year fixed-rate mortgage product was 1.36 percentage point. This would mean savings of approximately $194 on a loan valued at $250,000 if a consumer would choose a 5/1 Hybrid ARM as opposed to a 30-year fixed home loan; this monthly savings would cover the first five years of the LOL.

Yet another takeaway worth noting was the fact that 84 out of the 106 institutions surveyed offered Treasury-indexed ARMs, with the remaining 22 offering London Interbank Offered Rate (LIBOR)-indexed adjustable products. As smaller lenders were typically the ones offering Treasury-indexed products, with the larger lenders offering LIBOR-indexed products, the latter group took up more than half of all ARM originations covered by the Freddie Mac survey.

Freddie Mac vice president and chief economist Frank Nothaft elucidated on the takeaways on the new survey, stressing the advantages of ARMs in general as opposed to fixed-rate mortgages. “Homebuyers have preferred fixed-rate mortgages the past few years because of the low interest rates and the certainty of the monthly principal and interest payment,” said Nothaft in a statement. “As longer-term rates rise, ARMs with their lower initial interest rates will become more appealing to loan applicants.

Hybrid ARMs are particularly attractive because they have an initial extended fixed-rate period of three to ten years.” Going forward, Nothaft expects that ARMs will gradually increase in terms of market share, with the ARM market share expected to rise to about 12 percent in 2014, up from last year’s share of approximately 10 percent.

 

Back to February 2014 Archive

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