ARM At 8 Year Low

As fixed rates teeter below 7%, economist says refi boom has \"potential to continue\"
By SAM GARCIA
2/11/2002

The average 1-year adjustable rate mortgage (ARM) fell eight basis points (BPS) from last week to 5.04%, according Freddie Mac's weekly survey of thrifts, commercial banks and mortgage lending companies. A look at Freddie's historical tables indicates that the 1-year ARM has not been this low since early 1994 -- at a time when the industry was at the end of a previous wave of refinances.

Last week, the Federal Home Loan Bank of San Francisco reported that the cost of funds index -- or COFI -- was down to 3.074 percent, its lowest point in decades.

While ARM rates are hitting lows, ARM activity fell from last week. The Mortgage Bankers Association of America (MBA) reported that applications for ARM loans represented 15.50 percent of total applications, down from 16.3 percent. The drop in ARM activity can be at least partly attributed to an even bigger drop in fixed rates.

Freddie reported that the average 30-year fixed rate mortgage (FRM) fell 14 BPS from the prior week to 6.88%. The bigger drop caused the spread between the 30-year and the 1-year ARM to narrow to 1.84% from 1.90% last week.

Freddie's chief economist, Frank Nothaft, said "as long as inflation is not an issue in the economy, lending rates should remain around 7 percent."

Freddie said the average 15-year mortgage was 6.36%, down 15 BPS. The spread between the 15-year and 30-year edged up 1 basis point to 0.52%.

In its weekly commentary, HSH Associates attributed falling rates to reassuring inflation news; an unexpected decline in the labor cost per unit produced; and a report from the Institure of Supply Management Non-Manufacturing, which said activity in the economy's service sector declined last month.

MBA reported that overall loan applications rose 5.3% from last week. With the 30-year teetering below seven percent, it is likely that next week's applications will rise again. However, applications still remain at about half of November's level. Refinance applications, which were reported by MBA this week to have increased about 7 percent, are at about only one-third their November levels.

MBA economist Phil Colling says that refinance opportuinities still exist. He estimates about $5.7 trillion in mortgages are currently outsanding, with $2.5 trillion that "may have been made at relatively high rates. Therefore, the refinance boom has the potential to continue as long as mortgage rates remain low."

However, an economic report by Banc of America Securities LLC calls for the 10-year Treasury yield -- which mortgage rates closely follow -- to rise to nearly six percent by the end of the year. The 10-year Treasury yield was 4.88% Friday. With no change in the spread between Treasuries and mortgage rates, Banc of America's outlook would indicate mortgage rates would end the year around eight percent.

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