Refinances Flock to Fixed-Rate Mortgages

Of the prime, conforming adjustable-rate mortgage (ARM) borrowers that refinanced in the fourth quarter of 2008, 97 percent refinanced into a new conforming fixed-rate mortgage (FRM), up from a revised 85 percent in the third quarter, according to data released Monday by Freddie Mac (FRE). The quarterly refinance report, which looks at a sample of properties on which Freddie has funded at least two successive loans, also found that 99.7 percent of borrowers who had a FRM refinanced into another long-term FRM, 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 Freddie vice president and chief economist Frank Nothaft.  “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.” Only 3 percent of borrowers that initially held a hybrid ARM refinanced back into that product in the fourth quarter, down from 15 percent in the previous quarter, according to Freddie’s data. The exodus from hybrid ARMs in the fourth quarter suggests borrowers were enticed away from the product, although Freddie officials acknowledged in a media statement regarding the report that hybrid ARMs were more popular overall in 2008 among borrowers that initially held such loans than they were in 2007. Seventeen percent of hybrid ARM borrowers refinanced back into hybrid ARMs in 2008, up from 14 percent in 2007. “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,” Nothaft said. “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.” Write to Diana Golobay at Disclosure: The author held no relevant investment positions 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.

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