Discounts on initial rates for prime adjustable-rate mortgages have diminished, making them less attractive compared to fixed rates and pushing down their popularity, according to a new report.

During the first year, 3/1 hybrid ARMs were discounted 17 basis points, Freddie Mac reported in its 24th Annual ARM Survey announced today. A year earlier, the initial rate discount was 180 BPS. The 3/1, with an average initial rate of 5.83 percent, was available at 78 percent of lenders surveyed.

"Disruptions in the capital markets beginning in August and an increase in delinquencies on ARM product has led to a sharp decline in interest-rate discounting and a tightening of credit underwriting on ARMs in recent months," Freddie Chief Economist Frank Nothaft explained in the report.

On 5/1 ARMS, the most popular hybrid, the latest survey found the initial discount to be just 3 BPS, also down from 180 BPS. The average initial rate was 6.0 percent, 49 BPS above the 1-year ARM and just 0.1 percent below the average 30-year fixed-rate mortgage. The 5/1 was available at 93 percent of surveyed lenders.

The smaller initial rate discounts occurred even as fully-indexed ARM rates fell to the lowest level in three years, the survey indicated. The margin on all variable rate loans averaged 2.75 percent, about the same as a year earlier.

Hybrids are among the most widely offered ARM products, Freddie said.

Initial 1-year ARM rates on jumbo loans, at 5.74 percent, were 23 BPS higher than conforming loans -- the widest margin in seven years, Freddie said. The widening margin between jumbo and conforming ARMs was attributed to capital market disruptions.

Compared to fixed rates, ARMs now offer less of a savings, pushing ARM share down to 17 percent as of October -- the lowest level since June 2003 when fixed rates reached a 45 year low, the report said.

The survey was reportedly based on data collected from Dec. 17 to Dec. 21.