Mortgage meltdown: ARMs on the wane

Delinquency increases in 2007 caused the number of adjustable-rate mortgages issued last year to decrease, according to Freddie Mac
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NEW YORK (CNNMoney.com) -- The number of adjustable-rate mortgages issued by lenders declined in 2007 as loan delinquencies and economic problems took their toll on interest rate discounts, according to Freddie Mac's annual ARM survey.

As of October 2007, the government-sponsored loan buyer said, ARMs made up 17 percent of loan applications, their lowest level since June 2003.

Over the past year, delinquency rates on ARMs surpassed those of fixed rate mortgages, according to Freddie's chief economist Frank Nothaft. Rates hit 3.1 percent in September, as opposed to the 0.8 percent delinquency rate of prime fixed-rate loans.

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Many of those ARMs had low introductory teaser rates that reset to payments that homeowners could no longer afford. And as teaser rates rose, the loans became less attractive to potential borrowers.

"A year ago, the initial-rate discount on the popular 3/1 and 5/1 hybrid products was about 1.8 percentage points. In our latest survey, the rate discount had virtually disappeared on these products," said Nothaft in a statement.

According to Freddie Mac (FRE, Fortune 500), hybrid ARMs that contain an initial fixed-rate period of five years remain popular with families who intend to maintain their mortgage for five years or less. Five year hybrid ARM rates run about 0.1 percent below those of a 30-year fixed-rate mortgage.

"As ARMs became more expensive relative to fixed-rate loans during the closing months of 2007, the ARM share of lending declined," he said.

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