2% spread between ARM and fixed rate
By SAM GARCIA
3/15/2002

Mortgage applications tumbled this week as rates jumped -- with applications for refinance mortgages falling more than 24% from last week -- according to the Mortgage Bankers Association of America (MBA). In its most recent weekly survey of mortgage bankers, commercial banks and thrifts, MBA reported that overall applications were down 16%.

Refinance applications are about 21% less than the same week last year, and overall applications are down more than seven percent, according to MBA.

Fueling the decline in applications was rising mortgage rates. Freddie Mac said that according to this week's rate survey, the average 30-year fixed rate mortgage (FRM) was 21 basis points (BPS) higher than last week and 12 BPS higher than the same week last year. Freddie's weekly survey of 125 thrifts, commercial banks and mortgage lending companies has been conducted since 1971.

Freddie reported that the average 15-year FRM was 6.59%, 22 BPS higher than last week.

"Mortgage interest rates were up this week on news that February employment figures suggested an economic upturn," said Frank Nothaft, Freddie Mac's chief economist. "That news, however, puts a bit of upward pressure on long-term mortgage rates."

The average 1-year adjustable rate mortgage (ARM) edged up 1 BPS from last week to 5.08%. A year ago, the one-year was 1.21% higher. This week's smaller increase in the average ARM pushed the spread between the 30-year FRM and the 1-year ARM to 2.0 percent, making the ARM more attractive than it has recently been.

While this week's widening spread will probably not be reflected in application activity until next week, MBA said that ARM applications rose to 14.1% of total applications from 13.2% last week. A year ago, ARM applications represented only 9.1 percent of total applications.

Freddie's Nothaft said that shorter-term mortgage rates "remained almost unchanged, creating a greater incentive for homebuyers to choose 1-year ARM's. Although presently the ARM share of the market is only about 15 percent of applications, if long-term rates continue to rise, so will the share of ARM's."

Only 10% of the mortgage bankers, mortgage brokers and other industry experts surveyed by Bankrate.com this week believe rates will decrease more than 2 BPS over the next five weeks. Half of Bankrate's respondents think rates won't change while 40% think rates will increase.

An economic forecast released this week from the Economic Research Department at Banc of America Securities says that the 10-year Treasury yield is expected to reach six percent by the first quarter of next year. The 10-year Treasury -- which mortgage rates tend to follow -- is currently around 5.13 percent.

An article in today's Wall Street Journal said that when Federal Reserve policy makers meet next week, they are likely to hold interest rates. But the meeting could reportedly be the first turning point for monetary policy in more than a year if policy makers lay the verbal groundwork for the eventual shift to rate increases.

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