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Start Rate Discounts Climb

Freddie ARM survey

January 3, 2007

By MortgageDaily.com staff

Lenders offered deeper start rate discounts on adjustable-rate mortgages last year.

Mortgage bankers enticed ARM borrowers by offering lower initial interest rates during 2006, according to Freddie Mac's latest annual ARM survey of prime loans. The survey was conducted in December.

Freddie said the discount averaged 2.3% last year for conventional, conforming 1-year Treasury-indexed ARMs, up from 1.9% a year earlier and the highest level since 1997.

"When the interest-rate difference between a 30-year fixed-rate mortgage and the fully-indexed ARM rate decreases, lenders generally offer a larger initial rate discount on the ARM," said Freddie Chief Economist Frank Nothaft in the announcement. "The larger initial discounts increase the initial rate benefit of an ARM compared with fixed-rate loans, helping lenders to maintain ARM originations."

But as the spread between fixed rates and ARMs narrowed, ARM share has fallen -- to 25% in November, Freddie reported.

At the same time, hybrids have become more popular, with about 40% of ARMs being 5/1 hybrids in 2006, the report said. And while five out of six lenders offered the 5/1, only about half offered the traditional one-year ARM.

The average initial rate on 1-year ARMs was up about 30 basis points from a year prior, the statement said. The 5/1 rose 20 BPS during the period, while the 10/1 was unchanged.

"Starting rates for ARMs would have increased even further were it not for greater use of initial-rate discounts by lenders," the reported stated.

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