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 breathing room."
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.