Freddie Mac: ARMs Becoming Obsolete

McLean, Virginia-based mortgage financing giant Freddie Mac ""released statistics"":http://www.freddiemac.com/news/archives/corporate/2009/20090521_product_transition.html last week that showed in the first quarter of 2009, refinancing borrowers overwhelmingly chose fixed-rate over adjustable-rate mortgages (ARMs).
The GSE reported that more than 99 percent of prime borrowers who originally had a conforming ARM chose a new fixed-rate mortgage (FRM) when they refinanced. In addition, the company said, nearly 100 percent of homeowners who had a fixed-rate loan refinanced into another long-term fixed-rate product.
By comparison, during the same period last year, only about 86 percent of Freddie Mac's ARM borrowers refinanced into an FRM, with approximately 14 percent choosing another ARM or balloon mortgage as their new home loan product. And in Q1 2008, an estimated three percent of homeowners with an FRM opted to refinance into an ARM loan with a rate reset.
Frank Nothaft, Freddie Mac's VP and chief economist, said, ""Whether for refinance as our report shows or for home purchase, borrowers are shying away from ARM loans in the present environment. The lowest fixed mortgage rates in 50 years are attractive by themselves, and when we look at average ARM interest rates that are nearly the same as the fixed rates being offered, it is easy to see why borrowers are making the choice for fixed-rate mortgages.""
Nothaft explained, ""During the first quarter, initial interest rates on 5/1 hybrid ARM loans were as much as half a percentage point above interest rates on 30-year fixed-rate mortgages. Rates on 1-year ARMs were below those of 30-year fixed rates, but usually by about one- or two-eighths of a point along with the risk that the rate could be a lot higher in a year or two when the loan resets.""
Perhaps homeowners' disposition toward fixed-rate refinances will lessen the number of new defaults from what many economists consider to be the second wave of foreclosures - adjustable-rate mortgages with introductory rates that reset and push mortgage payments beyond homeowners' means.
The third and current wave of foreclosures, stemming from prime borrowers unable to fulfill their mortgage obligations due to unemployment and other financial conditions, may be more difficult to mitigate. Housing analysts consider the initial wave of the foreclosure crisis to be when speculators dumped property because of plunging real estate prices.