Borrowers Choose Long-Term Fixed-Rate Loans When Refinancing in First Quarter
Fixed-Rate Loans Continue to Dominate Choices of Refinancing Borrowers
May 20, 2008
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McLean, VA – Freddie Mac (NYSE:FRE) announced today that in the first quarter of 2008, 97 percent of prime borrowers who originally had a 1-year conforming adjustable-rate mortgage (ARM) chose a new conforming fixed-rate mortgage when they refinanced and 84 percent of prime borrowers that initially had a conforming hybrid ARM refinanced into a conforming fixed-rate loan as well. The comparable numbers in the fourth quarter were 94 percent and 90 percent, respectively.
"While lending standards have tightened significantly across all types of mortgage lending, it was the rates and terms that are being offered on different mortgages and worry among borrowers about higher future interest rates that made fixed-rate loans attractive to refinancing borrowers in the first quarter," said Frank Nothaft, vice president and chief economist for Freddie Mac. "Rates on 30-year fixed-rate conforming mortgages averaged 5.9 percent over the quarter and were as low as 5.5 percent for one week in January. In contrast, rates on 1-year Treasury-indexed conforming ARM loans averaged 5.1 percent and many borrowers didn't want to risk a higher payment in 2009 or 2010 for such a small difference in rate in the first year.
"The volatility in the bond markets that has caused both short and long term Treasury yields to bounce around has not affected mortgage rates nearly as much, and more importantly, mortgage rates have been fairly stable in recent months at historically low levels giving borrowers who are in a position to refinance a little breathing room."
The Refinance Product Transition Report indicates that 34 percent of borrowers who originally had a 15-year fixed-rate loan switched to a 30-year fixed-rate mortgage when they refinanced in the first quarter. The rate was 54 percent in the fourth quarter. Due to the widening gap between 15-year and 30-year fixed mortgages rates over the quarter, 13 percent of borrowers with 30-year fixed-rate loans chose 15-year fixed-rate when they refinanced in the first quarter, up from just 6 percent in the fourth quarter. Seventy-nine percent of borrowers who originally had a 30-year fixed-rate mortgage refinanced into another 30-year fixed-rate mortgage during the first quarter of this year. In the fourth quarter, 85 percent of 30-year fixed rate borrowers refinanced into that same product loan type.
The Report also indicates that almost zero percent of borrowers, regardless of original loan product, chose a new 1-year ARM, with interest-rate adjustments occurring on equal frequencies for the life of the loan. This is the first quarter since the beginning of 2002 that refinancing borrowers have rejected the short-term ARM product so sharply. Two percent of borrowers who originally held a 1-year ARM chose a longer-term hybrid ARM product and 16 percent of borrowers who initially had a hybrid ARM chose that type of mortgage product again when they refinanced.
These estimates come from a sample of properties on which Freddie Mac has funded at least two successive loans. Transactions are further screened to verify that the latest loan is for refinance rather than for home purchase.
|QUARTERLY PRODUCT TRANSITION STATISTICS|
|Quarter||Old Product||1-Year ARM1||ARM – Hybrid2||Ballon3||FRM 15yr4||FRM 20yr5||FRM 30yr6|
|ARM - Hybrid||0%||17%||0%||6%||12%||65%|
|ARM - Hybrid||0%||16%||0%||6%||13%||65%|
|ARM - Hybrid||0%||15%||0%||5%||10%||69%|
|ARM - Hybrid||0%||10%||0%||8%||6%||75%|
|ARM - Hybrid||0%||16%||0%||8%||4%||72%|
These estimates come from a sample of properties on which Freddie Mac has funded at least two successive loans. Transactions are further screened to verify that the latest loan is for refinance rather than for home purchase. Where applicable, data include amortizing as well as interest-only or option-payment loans.
1Adjustable-rate mortgages with rate resets at 1-year intervals for life of loan; contains a small number of other equal-frequency reset ARMs such as 3/3 ARMs, etc.
2Adjustable-rate mortgages with first rate reset period longer than other regular rate reset periods, such as 3/1 ARMs, 5/1 ARMs, etc.
3Includes all maturities with one rate reset.
4Fixed-rate mortgages with maturities of 15 years or shorter, with 15-year being the dominant product type.
5Fixed rate mortgages with maturities of 20 or 25 years.
6Fixed-rate mortgages with maturities of 30 years or more.
Although Freddie Mac attempts to provide reliable, useful information in this document, Freddie Mac does not guarantee that the information is accurate, current or suitable for any particular purpose. The information is therefore provided on an "as is" basis, with no warranties of any kind whatsoever. Opinions and estimates contained in this document are those of Freddie Mac currently and are subject to change without notice. Information from this document may be used with proper attribution. Alteration of this document is strictly prohibited. © 2007 by Freddie Mac.
Freddie Mac is a stockholder-owned corporation established by Congress in 1970 to support homeownership and rental housing. Freddie Mac purchases single-family and multifamily residential mortgages and mortgage-related securities, which it finances primarily by issuing mortgage pass through securities and debt instruments in the capital markets. Over the years, Freddie Mac has made home possible more than 50 million times, ensuring financing for one in six homebuyers and more than four million renters.