Fixed Rates Are Back

By Schneider, Howard | Mortgage Banking, July 2007 | Go to article overview

Fixed Rates Are Back


Schneider, Howard, Mortgage Banking


A changing real estate market is causing brokers to reach for different loans than they used last year, notes a recent industry survey by Wholesale Access Mortgage Research & Consulting, Columbia, Maryland. "There's been a major drop in the percentage of ARM [adjustable-rate mortgage] loans," says Larry Pearl, managing director at Wholesale Access. Pearl adds that borrowers are choosing fixed-rate mortgage (FRM) loans instead.

Freddie Mac also reports that almost nine out of 10 borrowers who refinanced a one-year adjustable-rate loan during the first quarter of 2007 decided to switch to fixed-rate financing. Additionally, 84 percent of homeowners with hybrid ARMs also chose a fixed-rate loan when refinancing. A year ago, slightly more than three-fourths of refinancing borrowers made a similar choice.

Amy Crews Cutts, Freddie Mac's deputy chief economist, notes that 30-year fixed rates averaged 6.2 percent in the first three months of this year. During that period, one-year Treasury-indexed ARMs averaged 5.5 percent. Cutts explains that borrowers with one-year ARMs would find their fully indexed rate to be higher than what they can obtain with today's fixed rates. It's not surprising that just 2 percent of borrowers with one-year adjustables refinanced back into another one-year ARM in the first quarter of 2007.

Cutts adds that hybrid ARMs with fixed rates for five years recently were at 6 percent. But just 6 percent of borrowers with 30-year home loans refinanced into a hybrid ARM to reduce their payments. More than four out of five homeowners with fixed-rate loans stayed with that product when refinancing earlier this year, according to Freddie Mac.

Yet refinancing patterns could change in the future, as inflation concerns are causing rates to trend higher. Long-term rates are going up faster than the short end of the yield curve. Freddie Mac Chief Economist Frank Nothaft forecasts "a gradual rise in mortgage rates over the remainder of the year, with sales slipping further in the second half of the year." Declining existing-home sales--and lower real estate values--have been the trend so far in 2007, according to the National Association of Realtors[R], Chicago.

Hard to qualify

Higher rates will keep more households from buying a home or refinancing soon. Tighter underwriting standards--particularly on subprime loans--also are making it more difficult for some consumers to obtain financing now, mortgage brokers note. Regulators are contemplating further restricting the use of sub-prime loans, as well.

Comptroller of the Currency John Dugan believes stated-income mortgages can lead to "misrepresentation" and, in its most extreme form, "outright fraud" by potential borrowers. In a May speech to members of Neighborhood Housing Services of New York City, he added that new federal regulations are being written to guide subprime lenders and attempt to reduce the misuse of these products. …

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