Strong ARM Tactics

1-year too attractive to ignore
By SAM GARCIA
5/17/2002

Adjustable rate mortgage (ARM) loan activity is on the rise and likely to strengthen. While fixed rates jumped 0.10% -- or ten basis points (BPS) -- from the prior week, the ARM barely changed.

In its survey of 125 thrifts, commercial banks and mortgage lending companies, Freddie Mac reported that the average one-year ARM was up just one basis point to 4.81%, not far from its lowest point since 1994. While the ARM was nearly unchanged, Freddie said that the average 30-year fixed rate mortgage (FRM) was 6.89%, up from 6.79% the prior week. The bigger jump in the 30-year average pushed the spread between FRM and the ARM to 2.08% from less than 2% last week.

The effects of the increasingly attractive ARM are reflected in the most recent Mortgage Bankers Association of America's (MBA's) survey of mortgage bankers, commercial banks and thrifts. According to MBA, ARM applications represented 17% of total applications, up from about 15% last week. ARM activity had been as low as 8.3% as recently as November.

Freddie said that the average 15-year FRM was 6.37%, up from 6.27% last week.

Overall applications were down nearly nine percent, according to MBA. Government applications in particular were down almost twenty percent, while refinance applications were off about 11 percent.

Commenting on the week's interest rate movements, Freddie's chief economist Frank Nothaft said, "the market interpreted recently released retail sales figures as a sign that the economy may now be recovering faster than originally thought, bringing fear of inflation back into the picture. But the good news is that April's Consumer Price Index (CPI), which came out yesterday, indicates inflation remains under control. This should help keep mortgage rates stable for the foreseeable future."

While half of Bankrate.com's survey respondents think rates will remain within 2 BPS of their current levels over the next five weeks, 44% think rates will rise. Bankrate.com's respondents include mortgage bankers, mortgage brokers and other industry experts.

"Unless the uptick in inflation is sustained further, rates are unlikely to break out of the range seen since December," said Greg McBride, Bankrate.com's financial analyst.

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