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Fixed-Rate Loans Dominant Refinance Choice in Second Quarter

Refinancing Borrowers Shy Away from Short-Term ARMs and Balloon Mortgages

For Immediate Release

August 11, 2008
Contact: corprel@freddiemac.com
or (703) 903-3933

 

McLean, VA – Freddie Mac (NYSE:FRE) announced today that in the second 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 87 percent of prime borrowers that initially had a conforming hybrid ARM refinanced into a conforming fixed-rate loan as well. 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.

"Even though refinancing borrowers who take out a 1-year adjustable rate mortgage (ARM) today would save about three-quarters of a percentage point in rate relative to a 5-year ARM or 15-year fixed-rate mortgage (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 fully indexed rate is the ARM's margin plus the 1-year constant-maturity Treasury yield.

The Refinance Product Transition Report indicates that 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, three-of-four chose the same product at refinance, and the other quarter chose shorter-term fixed-rate loans. These estimates 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.

QUARTERLY PRODUCT TRANSITION STATISTICS
New Product
Quarter Old Product 1-Year ARM1 ARM – Hybrid2 Ballon3 FRM 15yr4 FRM 20yr5 FRM 30yr6
200702 1-Year ARM 4% 10% 1% 19% 8% 58%
ARM - Hybrid 0% 15% 0% 6% 13% 65%
Balloon 0% 9% 0% 10% 9% 71%
FRM 15yr 0% 3% 0% 34% 10% 53%
FRM 20yr 0% 4% 0% 14% 22% 60%
FRM 30yr 0% 5% 0% 5% 11% 79%
200703 1-Year ARM 5% 8% 0% 17% 4% 65%
ARM - Hybrid 0% 15% 0% 5% 10% 69%
Balloon 0% 9% 2% 12% 9% 69%
FRM 15yr 0% 3% 0% 28% 11% 58%
FRM 20yr 0% 5% 0% 11% 21% 64%
FRM 30yr 0% 6% 0% 5% 9% 79%
200704 1-Year ARM 3% 2% 1% 22% 4% 67%
ARM - Hybrid 0% 10% 0% 8% 6% 75%
Balloon 0% 6% 10% 14% 6% 63%
FRM 15yr 0% 1% 0% 36% 8% 54%
FRM 20yr 0% 3% 0% 16% 23% 58%
FRM 30yr 0% 3% 0% 6% 6% 85%
200801 1-Year ARM 5% 2% 1% 22% 4% 66%
ARM - Hybrid 0% 20% 0% 8% 4% 67%
Balloon 0% 8% 5% 20% 6% 61%
FRM 15yr 0% 1% 0% 57% 4% 37%
FRM 20yr 0% 4% 0% 39% 19% 39%
FRM 30yr 0% 2% 0% 13% 7% 78%
200802 1-Year ARM 0% 3% 0% 29% 7% 60%
ARM - Hybrid 0% 13% 0% 8% 5% 75%
Balloon 0% 6% 0% 18% 6% 70%
FRM 15yr 0% 1% 0% 51% 6% 43%
FRM 20yr 0% 2% 0% 32% 19% 46%
FRM 30yr 0% 1% 0% 14% 8% 76%

Notes:

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.

These data can be found at www.FreddieMac.com/finance/refi_archives.html. For more information, contact us at chief_economist@freddiemac.com.

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. © 2008 by Freddie Mac.

Freddie Mac is a stockholder-owned corporation established by Congress in 1970 to provide liquidity, stability and affordability to the nation's residential mortgage markets. Freddie Mac raises capital on Wall Street and throughout the world's capital markets to finance mortgages for families across America. Over the years, Freddie Mac has made home possible for one in six homebuyers and more than five million renters.

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