Borrowers Flock to Fixed-Rate Mortgages in Q2
A mortgage mess unlike any other has borrowers running -- not walking -- into fixed-rate mortgages at a rate not seen, well, pretty much ever. Freddie Mac (FRE) said Tuesday morning that in the second quarter of 2008, 97 percent of prime borrowers who originally had a 1-year conforming ARM chose a new conforming fixed-rate mortgage when they refinanced. Another 87 percent of prime borrowers that initially had a conforming hybrid ARM refinanced into a conforming fixed-rate loan, as well. The strong favoring of fixed-rate mortgages continues an already strong trend observed in Q1, when the revised comparable numbers in the first quarter were 92 percent and 80 percent, respectively. Furthermore, nearly all borrowers who had a fixed-rate loan refinanced into another long-term fixed-rate loan; 99 percent of 30-year fixed-rate borrowers refinancing chose another fixed-rate loan, Freddie said. "Even though refinancing borrowers who take out a 1-year ARM today would save about three-quarters of a percentage point in rate relative to a 5-year ARM or 15-year FRM, the concerns about inflationary pressures leading to future interest rate increases may be causing borrowers to choose the safety and certainty of fixed rates," said Frank Nothaft, vice president and chief economist for Freddie Mac. "In the second quarter, mortgage rates on all products crept up a bit, with 15-year fixed mortgage rates averaging 5.7 percent, the same as for a 5-1 hybrid ARM loan. "Teaser rates on ARMs have largely disappeared. During the second quarter, the initial interest rate on 1-year ARMs averaged three-tenths of a percentage point higher than the fully indexed rate. Without an extra discount, ARMs just aren't attracting many borrowers in today's market." The proof is in the pudding for that line of thinking, too: only 1 percent of borrowers who originally had a fixed-rate loan switched to an ARM loan. About one-half of borrowers with a 15-year fixed-rate loan refinanced back into the same product, with the other one-half choosing longer-term fixed-rate loans. Among borrowers who originally had a 30-year fixed-rate, Freddie said that three-of-four chose the same product at refinance, and the other quarter chose shorter-term (but still fixed-rate) loans. These estimates used in the study come from a sample of properties on which Freddie Mac has funded at least two successive loans and the latest loan is for refinance rather than for home purchase. For more information, visit http://www.freddiemac.com. Disclosure: The author was long FRE when this story was published; indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.