Market Shares of ARMs Fall

[Jan 20, 2008.]

Freddie Mac reports that the total market share of adjustable rate mortgages decreased last year to its lowest point since the year 2003.

Such mortgages make up some 17% of the overall market. When the housing market was faring well, back in 2004, such mortgages comprised 33% of the market. Since Freddie Mac began recording such data in 1995, adjustable rate market share has varied from about 11% to 33%.

Meanwhile, starting rates for adjustable rate mortgages are close to what the rates were the previous year. This is despite the fact that the Federal Reserve cut its federal funds rate from 5.25% to 4.25% since the year 2006. On the other side of the equation, fixed rates on 30-year mortgages dropped under 6%.

Freddie Mac's chief economist has noted that consumers react to changes in the costs of different types of loans. Therefore, when adjustable rate mortgages became more expensive than fixed-rate loans near the end of 2007, the share of adjustable rate mortgages dropped.

In October, the Federal Reserve discovered that 41% of commercial banks had toughened standards for prime mortgages in the 3rd quarter. In addition, 60% of banks providing non-traditional loans had also tightened loan requirements.

Because of reduced rate discounts and stricter guidelines, adjustable rate mortgages are not as popular as they used to be.

This is an extremely difficult time for the housing market. The housing slump is the worst recorded in 16 years. Home sales have been dropping, and home prices have been plummeting. As a result, homeowners are having a difficult time making a profit from the sale of their homes. At the same time, prospective homebuyers are having a more difficult time obtaining loans. The situation has created a perfect storm within the housing industry which might not abate until the middle of 2008 or even 2009.

Julie Ann Amos
January 20th 2008

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