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ARMs Strengthen

More prospective borrowers are eyeing adjustable-rate mortgages, and with this week’s big decline in the one-year ARM — the share is likely to rise. Mortgage rates improved and new loan applications fell, while indications are that fixed rates will head higher.

The average 30-year fixed-rate mortgage dropped 0.03% from last week to 5.04% in Freddie Mac’s latest survey of 125 thrifts, credit unions, commercial banks and mortgage lenders. A year ago, the 30-year averaged 5.78%.

The 30-year is projected to average 5.2% this quarter and in the fourth quarter according to Freddie’s September 2009 Economic and Housing Market Outlook.

Freddie said the average 15-year fixed rate was 4.47%, also down 3 basis point from last week.

Frank Nothaft, the chief economist over at Freddie, said it was the third consecutive week of declines for fixed rates.

The 10-year Treasury bond yield, which its tracked by fixed rates, was 3.443% in early trading, higher than 3.355% seven days earlier and suggesting mortgage rates will rise.

The 100 panelists surveyed for the week Sept. 10 to Sept. 16 by offered little guidance, with 38% predicting an increase of at least 3 BPS during the next 35 to 45 days, 38% forecasting no change and 24% projecting a decline.

There was no weekly change in the five-year Treasury-indexed hybrid ARM, which Freddie reported at 4.51%.

But the one-year Treasury-indexed ARM fell 6 BPS from last week to 4.58%, according to Freddie’s survey. The one-year was 45 BPS better than last year. Freddie expects the one-year to average 4.8% in both the third and fourth quarters.

The yield on the underlying one-year Treasury bill was 0.38% yesterday, lower than 0.40% a week earlier, according to U.S. Department of the Treasury data.

The six-month London Interbank Offered Rate, or LIBOR, was 0.68% yesterday, off from 0.70% a week earlier, reported. LIBOR is the index on a big share of subprime ARMs.

Even though the one-year ARM rose last week as the 30-year fixed-rate eased, the share of borrowers who opted for ARMs increased to 6.0% in the Mortgage Bankers Association’s Weekly Mortgage Applications Survey for the week ended Sept. 11 from 5.8 percent a week earlier. Freddie has ARM share pegged at just 4% for the third and fourth quarter.

But overall applications decreased 9% on a seasonally adjusted basis from MBA’s prior survey and 19% from a year earlier. A 10% drop in purchase activity drove the weekly decline.

Refinances retreated 7% from the previous week, while refinance share edged up to 61% from the prior week’s 60%, MBA reported. Freddie projects a 55% refinance share through the end of the year.

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