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Refinancing Borrowers Shun ARM Loans in Fourth Quarter of 2008

15-Year Fixed-Rate Mortgages Gain in Popularity With Low Interest Rates

For Immediate Release

February 23, 2009
Contact: corprel@freddiemac.com
or (703) 903-3933


McLean, VA – Freddie Mac (NYSE:FRE) announced today that in the fourth quarter of 2008, 97 percent of prime borrowers who originally had a conforming adjustable-rate mortgage (ARM) chose a new conforming fixed-rate mortgage when they refinanced, up from a revised 85 percent in the third quarter. Furthermore, 99.7 percent of borrowers who had a fixed-rate loan refinanced into another long-term fixed-rate loan, up from a revised 97 percent in the third quarter.

"The very low interest rates for fixed-rate loans compared with ARM rates in the fourth quarter, combined with worries that rates may rise in the future when the economic recession ends, enticed refinancing borrowers to seek the security of long-term fixed-rate mortgages," said Frank Nothaft, vice president and chief economist for Freddie Mac. "When borrowers can lock in a rate of 5 percent or less for 15 years or longer, it’s hard to find a reason not to take it.

"During much of the fourth quarter, initial interest rates on hybrid ARM loans were close to or above interest rates on 15-year and 30-year fixed-rate mortgages. In that pricing environment, fixed-rate loans appear very attractive to borrowers. As a consequence, nearly all borrowers who refinanced chose a fixed-rate loan."

The Refinance Product Transition Report indicates that only 3 percent of borrowers who initially had a hybrid ARM refinanced back into that product, down from 15 percent who chose to refinance back into another hybrid ARM in the third quarter. But overall, hybrid ARMs were more popular in 2008 among borrowers who initially had such loans than they were in 2007. Seventeen percent of hybrid ARM borrowers refinanced back into a hybrid ARM in 2008 versus 14 percent in 2007. In contrast, refinancing borrowers who initially held 1-year ARMs chose fixed-rate mortgages over any ARM product more often in 2008 than they did in 2007.

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
200704 1-Year ARM 3% 2% 1% 23% 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% 3% 1% 22% 4% 66%
ARM - Hybrid 0% 21% 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% 2% 0% 29% 7% 61%
ARM - Hybrid 0% 14% 0% 8% 4% 74%
Balloon 0% 7% 0% 17% 6% 70%
FRM 15yr 0% 1% 0% 49% 6% 44%
FRM 20yr 0% 3% 0% 31% 19% 47%
FRM 30yr 0% 2% 0% 14% 8% 77%
200803 1-Year ARM 3% 5% 0% 23% 7% 62%
ARM - Hybrid 0% 15% 0% 8% 3% 74%
Balloon 0% 8% 0% 20% 5% 68%
FRM 15yr 0% 2% 0% 38% 5% 56%
FRM 20yr 0% 4% 0% 19% 12% 65%
FRM 30yr 0% 3% 0% 10% 4% 83%
200804 1-Year ARM 0% 0% 0% 35% 6% 59%
ARM - Hybrid 0% 3% 0% 6% 2% 88%
Balloon 0% 1% 0% 14% 5% 79%
FRM 15yr 0% 0% 0% 38% 4% 57%
FRM 20yr 0% 0% 0% 21% 13% 66%
FRM 30yr 0% 0% 0% 8% 4% 88%

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. Row totals may not sum to 100% due to rounding.

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. © 2010 by Freddie Mac.

Freddie Mac was established by Congress in 1970 to provide liquidity, stability and affordability to the nation's residential mortgage markets. Freddie Mac supports communities across the nation by providing mortgage capital to lenders. Over the years, Freddie Mac has made home possible for one in six homebuyers and more than five million renters.

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