Monday, June 02, 2008

IS AMERICAN HOMEOWNER’S LOVE AFFAIR WITH ADJUSTABLE-RATE LOANS OVER?

The American homeowner’s love affair with risky adjustable-rate mortgages may be over.

A new Freddie Mac report covering the first quarter of 2008 revealed that 97 percent of the borrowers who originally took out a 1-year adjustable-rate mortgage (ARM) chose to refinance with a new fixed-rate mortgage.

Regardless of original loan product, the report also indicated that virtually no borrowers, chose a new 1-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, Freddie Mac said.

Meanwhile, 79 percent of borrowers who originally had a 30-year fixed-rate mortgage refinanced opted to safely refinance with a similar 30-year loan during the first quarter of this year. In the fourth quarter of last year, 85 percent of 30-year fixed-rate borrowers refinanced into that same product loan type, Freddie Mac reported.

“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 of 2008,” said Frank Nothaft, vice president and chief economist for Freddie Mac.

“Rates on 30-year fixed-rate mortgages averaged 5.9 percent over the first quarter and were as low as 5.5 percent for one week in January,” Nothaft said.

“In contrast, rates on 1-year Treasury-indexed ARM loans averaged 5.1 percent and many borrowers didn’t want to risk a higher payment in 2009 or 2010 for such a small difference in rate in the first year.”

Nothaft said volatility in the bond markets that have caused both short-term 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.”

Despite the popularity of 30-year fixed loans, interest charges on them appear to be on the rise. At the end of May, Freddie Mac’s Primary Mortgage Market Survey reported that benchmark 30-year fixed-rate mortgages averaged 6.08 percent, up from 5.98 percent a week earlier. Last year at this time, the 30-year fixed loans averaged 6.42 percent.

Meanwhile, rates on 1-year Treasury-indexed ARMs averaged 5.22 percent at the end of May, down slightly from 5.24 percent a week earlier. At this time last year, the 1-year ARM averaged 5.57 percent.

“Mortgage rates drifted up over market concerns that the Federal Reserve Board may raise short-term rates later this year,” said Nothaft.