ARM's Are In, Refi's Are Out

No sign of lower rates on the horizon
By SAM GARCIA
2/4/2002

Applications for mortgage refinances tumbled more than 36% from last week, according to the Mortgage Bankers Association of America's (MBA) weekly application survey of mortgage companies, mortgage brokers, commercial banks, thrifts, life insurance companies and others in the mortgage lending field. The drop in refi's helped push overall loan applications down by 25.5%.

MBA said that adjustable rate mortgages (ARM) made up more than sixteen percent of total applications, up from 14.6% last week. ARM activity was as low as 8.3% in November. As it appears less likely that rates will head lower again soon, originators are motivated to save otherwise lost refinance applications by promoting the lower initial rates available on ARM products.

"The share of ARM applications is determined primarily by the absolute level of the 30-year fixed rate and the difference between the 30-year fixed rate and the 1-year ARM rate," said Doug Duncan, MBA's Chief Economist.

Freddie Mac reported that the average 1-year ARM was 5.12%, slightly higher than last week's 5.10%. The spread between the 30-year fixed rate mortgage (FRM), which Freddie reported averaged 7.02%, and the 1-year ARM rose to 1.90 percent from 1.86 percent the prior week. "In recent weeks the difference between the 30-year fixed rate and the 1-year ARM rate is greater than it has been since September 1997," said MBA's Duncan "These factors have combined to make 1-year ARMs more attractive for borrowers."

Freddie said that the average 30-year FRM was up six basis points (BPS) from the prior week, while the 15-year FRM -- which was reported at 6.51% -- was up seven BPS. Freddie's survey of thrifts, commercial banks and mortgage lending companies indicated that fixed rates were highest in the North Central region, where the average 30-year was 7.11 percent. The region with the lowest average was the Southeast, where the 30-year was 6.98 percent.

Bankrate.com's survey of mortgage bankers, mortgage brokers and other industry experts gave no clear indication this week of which way rates are headed, with close to 1/3 each either expecting rates to fall, rise or remain unchanged. Bankrate.com's own financial analyst, Greg McBride, expects rates to increase. "The overall trend in mortgage rates will be higher as the economy strengthens. There will be plenty of ups and downs along the way though, as financial markets grapple with a weak business climate and anemic (perhaps questionable) corporate profits," said McBride.

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