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Adjustable-Rate Mortgages Losing Ground

Few borrowers are asking their lenders for adjustable-rate mortgages (ARMs) these days, what with all the bad publicity paid to ARM resets in the face of soaring foreclosures. Indeed, their appeal in the past has[IMAGE]been the rock-bottom borrowing costs that come with them initially, but with rates for fixed mortgages sitting at record lows themselves and the industry's continued focus on ""sustainable mortgages,"" ARMs are losing their appeal.

An ""annual report on the ARM market"":http://www.freddiemac.com/news/archives/rates/2010/20100119_09armsurvey.html published by Freddie Mac Tuesday shows adjustable-rate mortgages accounted for just 3 percent of all conventional home purchase loans in 2009. That's the smallest piece of the pie for ARMs since at least 1982. At that time, information from the Federal Housing Finance Agency shows they made up 62 percent of all new mortgages.

""Fixed-rate lending has dominated the home mortgage market over the past year because of the 50-year low in interest rates for this product and the comfort that a fixed principal-and-interest payment assures the consumer,"" said Frank Nothaft, Freddie Mac's VP and chief economist.

While ARM lending has been limited, Nothaft says those consumers who prefer an ARM generally have many lenders and products to choose from. Lenders who offer ARMs are seeing more interest for hybrids as opposed to annually adjusting ARMs, according to Freddie Mac's study.


The GSE says the most offered product in its survey was the 5/1 ARM, which has a fixed rate for five years and then adjust annually afterward. The survey shows more than four out of five ARM lenders quoted rates for 5/1 loans. One-year ARMs, on the other hand, which adjust every year, are fast diminishing in appeal.

Freddie Mac says traditionally, the 1-year ARM dominated the ARM market. As early as 1997, _all_ ARM lenders offered a conforming 1-year adjustable-rate mortgage. Yet in 2009, only 23 percent of ARM lenders offered this product.

But many experts fear adjustable-rate mortgages already in play that were taken out during the housing boom, particularly so-called exotic option ARMs, threaten to flood the U.S. housing market with a new wave of defaults and foreclosures.

A study by ""First American CoreLogic"":http://www.facorelogic.com last September found that $71 billion of interest-only ARM loans were scheduled to reset within 12 months. The company's analysis shows the year after, another $100 billion will reset, and from mid-2011 to mid-2012, another $400 billion will reset â€" in many cases increasing borrowers' monthly payments by as much as 75 percent as the principal starts amortizing.

As ""DSNews.com previously reported"":http://dsnews.comarticles/loan-resets-projected-to-cause-mortgage-crisis-in-2010-2009-12-11, the Consumer Mortgage Audit Center is projecting another mortgage crisis as large as the subprime because of ARM resets.

""Fitch Ratings expects"":http://dsnews.comarticles/fitch-47-billion-in-loan-resets-to-place-added-stress-on-residential-market-2010-01-12 rate resets in 2010 to place added stress on the secondary mortgage market as well. The agency says more than $47 billion of the prime and Alt-A loans backing residential mortgage-backed securities (RMBS) are due to reset over the next 12 months. According to Fitch's analysis, 60-day delinquency rates have risen over 250 percent in the 12 months following previous recasts for prime and Alt-A loans.