Despite a flattening yield curve, the share of adjustable rate originations has remained near a decade-high level.
Short-term rates were pushed up at every Federal Reserve meeting last year, Freddie Mac Chief Economist Frank Nothaft noted in the opening of the company's 22nd Annual Adjustable-Rate Mortgage Survey released today and based on borrower data collected between December 19 to December 22.
The yield spread between the 10-year Treasury and the 1-year Treasury started 2005 at 1.50%, but ended at zero, according to the survey. The phenomenon, known as a flattening yield curve, squeezed the spread between fixed rate loans and ARMs -- making adjustable rate loans less appealing.
"In the last half of 2000, the last time the Treasury yield curve inverted, the one-year conforming, conventional ARM rate had a discount of about 1.6 percentage points," said Freddie economist Michael Schoenbeck in the survey. "Yet the ARM share of conventional originations was in the 15 to 20 percent range, well below the shares for much of 2004 and 2005."
The ARM share through November 2005 was 32%, according to Freddie, which manages $1.7 trillion in mortgages. "Since 1995, the first year that Freddie Mac collected ARM share data, the ARM share has fluctuated between an annual low of 11 percent in 1998 and a high of 33 percent in 2004."
Freddie said last year's narrower spreads led lenders to offer bigger initial discounts on adjustable rates. The average discount on one-year ARM at the end of 2005 was 1.9% -- about a half percent more than a year earlier.
Forty percent of ARMs originated last year were 5/1 hybrids, Nothaft said. Of the lenders that offer adjustable rate products, 80% offered the 5/1 while only 56% offered the one-year -- the lowest level during the 22 years the survey has been conducted.
In line with the 5/1's popularity with lenders, the average 5/1 rose just 80 BPS during 2005 while the average 1-year rose 100 basis points.