Freddie Mac Q1 study: Borrowers reject short-term ARMs when refinancingMortgagePress.comFreddie Mac, refi, ARMs, Frank Nothaft, Refinance Product Transition Report
Freddie Mac has announced that in the first quarter of 2008, 97
percent of prime borrowers who originally had a one-year conforming
adjustable-rate mortgage (ARM) chose a new conforming fixed-rate
mortgage when they refinanced and 84 percent of prime borrowers
that initially had a conforming hybrid ARM refinanced into a
conforming fixed-rate loan as well. The comparable numbers in the
fourth quarter were 94 percent and 90 percent, respectively.
"While lending standards have tightened significantly across all
types of mortgage lending, it was the rates and terms that are
being offered on different mortgages and worry among borrowers
about higher future interest rates that made fixed-rate loans
attractive to refinancing borrowers in the first quarter," said
Frank Nothaft, vice president and chief economist for Freddie Mac.
"Rates on 30-year fixed-rate conforming mortgages averaged 5.9
percent over the quarter and were as low as 5.5 percent for one
week in January. In contrast, rates on one-year Treasury-indexed
conforming ARM loans averaged 5.1 percent and many borrowers didnt
want to risk a higher payment in 2009 or 2010 for such a small
difference in rate in the first year.
"The volatility in the bond markets that have caused both short
and long term Treasury yields to bounce around has not affected
mortgage rates nearly as much, and more importantly, mortgage rates
have been fairly stable in recent months at historically low levels
giving borrowers who are in a position to refinance a little
The Refinance Product Transition Report indicates that 34
percent of borrowers who originally had a 15-year fixed-rate loan
switched to a 30-year fixed-rate mortgage when they refinanced in
the first quarter. The rate was 54 percent in the fourth quarter.
Due to the widening gap between 15-year and 30-year fixed mortgages
rates over the quarter, 13 percent of borrowers with 30-year
fixed-rate loans chose 15-year fixed-rate when they refinanced in
the first quarter, up from just six percent in the fourth quarter.
Seventy-nine percent of borrowers who originally had a 30-year
fixed-rate mortgage refinanced into another 30-year fixed-rate
mortgage during the first quarter of this year. In the fourth
quarter, 85 percent of 30-year fixed rate borrowers refinanced into
that same product loan type.
The Report also indicates that almost zero percent of borrowers,
regardless of original loan product, chose a new one-year ARM, with
interest-rate adjustments occurring on equal frequencies for the
life of the loan. This is the first quarter since the beginning of
2002 that refinancing borrowers have rejected the short-term ARM
product so sharply. Two percent of borrowers who originally held a
1-year ARM chose a longer-term hybrid ARM product and 16 percent of
borrowers who initially had a hybrid ARM chose that type of
mortgage product again when they refinanced.
These estimates come from a sample of properties on which
Freddie Mac has funded at least two successive loans. Transactions
are further screened to verify that the latest loan is for
refinance rather than for home purchase.
For more information, visit www.freddiemac.com.