ADJUSTABLE-RATE MORTGAGE SHARE OF THE MARKET FALLS TO 1998 LEVEL, ACCORDING TO 18TH ANNUAL SURVEY BY FREDDIE MAC

Low Cost of Fixed-Rate Mortgage Rates Lures Homebuyers Away From ARMs

McLean, VA – Adjustable Rate Mortgages (ARMs) remained out of favor in 2001, falling to only 12 percent of the market in 2001 from 23 percent in 2000, according to Freddie Mac's 18th annual survey of ARM rates. The ARM share was the lowest since 1998's 11 percent share, which was an all-time low from the time ARMs came to be widely available in the early 1980s.

The survey also found that although the spread between fixed-rate mortgages (FRMs) and the first-year ARM rate went from 0.21 percentage points at the beginning of the year to 1.91 percentage points at the end of 2001, thus reducing the cost of ARMs relative to FRMs, this attractiveness did not impress homebuyers. Most homebuyers opted for the low FRMs, which were at levels not seen for much of the last 30 years.

"The average lender no longer offers a first-year discount from the fully indexed rate," said Frank Nothaft, Freddie Mac chief economist. "This has occurred, in part, because the one-year Treasury yield that serves as an index is so low that lenders need not offer a rate discount to create a sizable interest-rate savings for borrowers. The FRM-ARM rate difference averaged about one and seven-eights percentage points in December, which is the widest monthly difference since September 1997."

This is the first time in the 18-year history of Freddie Mac's ARM survey that one-year adjustables did not have an initial rate that was below the fully indexed rate. Three-year adjustables (3/3 ARMs), however, continued to have an initial discount of 0.57 percentage points from their fully indexed rate.

Additionally, Freddie Mac's survey found that the share of ARM lenders offering 3/3 ARMs plummeted by one half from previous 2000 levels - only 16 percent of lenders offered the 3/3 ARM product. Furthermore, lenders have backed away from offering FHA ARMs as well. The number of lenders offering FHA ARMs also fell in half compared to 2000, to 35 percent of lenders surveyed.

"However, the 3/1 and 5/1 ARMs continued to be more popular among lenders," remarked Nothaft. "These products are known as hybrid ARMs because they combine an initial fixed-rate period of three or five years with annual adjustment thereafter. Hybrid ARMs are especially attractive to families who plan to be in their home for three to five years, because the interest rate is lower than on a 30-year FRM. Why pay for 30-year credit if you are sure you will be selling the home within a few years?"

In the first quarter of 2001, the Federal Home Finance Board indicated that among Treasury-indexed ARMs, the 1/1 represented 44 percent, the 5/1 was 36%, the 7/1 was 12%, and the 3/1 comprised 4% of ARM originations.

Freddie Mac is a stockholder-owned corporation established by Congress in 1970 to support homeownership and rental housing. Freddie Mac purchases single-family and multifamily residential mortgages and mortgage-related securities, which it finances primarily by issuing mortgage passthrough securities and debt instruments in the capital markets. Over the years, Freddie Mac has opened doors for one in six homebuyers and more than two million renters in America.

Various ARM Product Features in 2001

1-Year ARMs

3-Year ARMs

Longer Initial-Period ARMs

Conforming

Jumbo

FHA

3/1

3/3

5/1

7/1

10/1

Loan Terms

-- -- -- -- -- P e r c e n t a g e P o i n t s -- -- -- -- --

Initial Interest Rate	5.27	5.32	5.42	5.75	5.86	6.37	6.75	7.07
Index Rate	2.23	2.23	2.23	---	3.68	---	---	---
Margin	2.77	2.72	2.67	2.78	2.75	2.77	2.77	2.78
Fully-Indexed Rate	5.00	4.95	4.90	---	6.43	---	---	---
Initial Discount	-0.27	-0.37	-0.52	---	0.57	---	---	---
Initial Interest Rate	7.05	7.41	7.21	7.27	7.40	7.29	7.42	7.58
Fees and Points	0.8	0.8	0.6	0.8	0.8	0.7	0.8	0.8
Fixed-Adjustable Rate Spread	1.88	2.09	1.85	1.40	1.29	0.78	0.40	0.08
Percent of ARM Lenders Offering Product	95	86	35	82	16	85	62	38

Notes: The sample is limited to ARMs indexed to either the 1-year or the 3-year constant maturity Treasury (CMT) yield. Data were collected from 94 ARM lenders during the week ending December 21, 2001. The 3-year, 5-year, 7-year and 10-year ARM results are limited to conforming loans. The index rate is the value of the weekly average 1-year or 3-year CMT yield for the week ending December 21, 2001 and is shown only for the 1-Year and 3/3 ARM products. The fully-indexed rate is the sum of the index rate and the margin. The initial discount is the fully-indexed rate less the initial interest rate. The fixed-adjustable rate spread is based on the average 30-year conforming fixed-rate mortgage (FRM) commitment rate of 7.15 percent, and the average 30-year Jumbo FRM and average 30-year FHA FRM commitment rates of 7.41 percent and 7.27 percent, respectively, as reported by BanxQuote for the week ending December 21, 2001.