NEW YORK -- U.S. homeowners continued to pile out of adjustable-rate mortgages taken out during the housing boom in a bid to escape interest-rate volatility plaguing markets, according to Freddie Mac data.
Some 86 percent of borrowers in hybrid adjustable-rate mortgages — loans with a fixed rate for the initial three to 10 years — guaranteed by Freddie Mac obtained fixed-rate loans last quarter, the McLean, Virginia-based company said. In the first quarter, 88 percent of hybrid ARM borrowers refinanced to a fixed-rate loan.
The average savings of 0.9 percentage point on a one-year ARM over a fixed-rate mortgage is seen as small compensation to accept the risk that the rate may rise, analysts said.
Soaring delinquencies on riskier ARMs that have contributed to lender and hedge fund failures have also steered consumers away from the products and influenced investors away from related bonds.
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Switching from ARMs to fixed-rate loans is "an ongoing phenomenon that is unlikely to end any time soon," said Richard Lightburn, head of mortgage trading at HSBC in New York. Lenders are backing away from making new ARMs since the loans are getting hard to sell, he added.
Economists are concerned that tighter underwriting standards may make borrowers with hybrid ARMs unqualified for a new loan, worsening a credit crisis that began with subprime lending. Monthly payments on $1.2 trillion in ARMs are slated to reset this year and next, according to Bank of America.
The guaranteed mortgage security programs of Freddie Mac and rival Fannie Mae — which deal mostly in loans of "prime" quality — have benefited from the shift toward their bread and butter fixed-rate products. Monthly issuance of 30- and 40-year fixed-rate mortgage bonds rose to about $70 billion in June, the most since September 2005, according to FTN Financial.
"The biggest driver (to fixed-rate production) this year has definitely been the looming hybrid resets," said Phil Guth, a vice president of mortgage securitizations at Freddie Mac.
The ability of lenders to push borrowers into stricter mortgage programs of Freddie Mac and Fannie Mae from those administered by Wall Street banks will be a key to limiting "contagion risk" in the mortgage market, Lehman Brothers analysts said in a research note.
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