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Refinancing Borrowers Shun ARMs

Ninety-seven percent of prime borrowers who originally had a conforming adjustable-rate mortgage (ARM) chose a new conforming fixed-rate mortgage (FRM) when they refinanced in the fourth quarter of 2008, according to a report released today by ""Freddie Mac"":http://www.freddiemac.com analyzing refinancings funded by the GSE.
That 97 percent statistic, Freddie Mac said, is a significant jump from the 85 percent of prime ARM borrowers who refinanced to conforming FRMs in the third quarter. The GSE also reported that 99.7 percent of borrowers who had a fixed-rate loan refinanced into another long-term fixed-rate loan, up from a revised 97 percent in the third quarter.
Frank Nothaft, VP and chief economist for Freddie Mac, explained, ""The very low interest rates for fixed-rate loans compared with ARM rates in the fourth quarter, combined with worries that rates may rise in the future when the economic recession ends, enticed refinancing borrowers to seek the security of long-term fixed-rate mortgages.
""When borrowers can lock in a rate of 5 percent or less for 15 years or longer, it’s hard to find a reason not to take it,"" Nothaft continued. ""During much of the fourth quarter, initial interest rates on hybrid ARM loans were close to or above interest rates on 15-year and 30-year fixed-rate mortgages. In that pricing environment, fixed-rate loans appear very attractive to borrowers. As a consequence, nearly all borrowers who refinanced chose a fixed-rate loan.""
Despite the fourth quarter numbers, Freddie Mac said that overall, hybrid ARMs were more popular in 2008 among borrowers who initially had such loans than they were in 2007. Seventeen percent of hybrid ARM borrowers refinanced back into a hybrid ARM in 2008 versus 14 percent in 2007.
Freddie Mac's report comes on the heels of an ""announcement"":http://dsnews.comindex.php/home/news_story/2576 by the Obama Administration that it plans to institute a new program that will help as many as 4 to 5 million homeowners with loans owned or guaranteed by Fannie Mae or Freddie Mac refinance through the GSEs at a lower interest rate. The low-cost refinancing program could reduce mortgage payments for struggling homeowners by thousands of dollars per year.
Commenting on the new GSE refinancing program, Herb Allison, president and CEO of ""Fannie Mae"":http://www.fanniemae.com, said, ""The Administration's unprecedented effort to prevent foreclosures and expand refinancing options for more borrowers offers hope to many struggling families across America. This is just the beginning of a sustained effort that will build over time.""

About Author: Carrie Bay

Carrie Bay is a freelance writer for DS News and its sister publication MReport. She served as online editor for DSNews.com from 2008 through 2011. Prior to joining DS News and the Five Star organization, she managed public relations, marketing, and media relations initiatives for several B2B companies in the financial services, technology, and telecommunications industries. She also wrote for retail and nonprofit organizations upon graduating from Texas A&M University with degrees in journalism and English.

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