WASHINGTON - Adjustable-rate loans continued their steady rise in popularity to reach 49% of all mortgages closed in October. That was up from 46% in September, according to the Federal Housing Finance Board.
October's ARM numbers were the highest since May 1989, when 53% of new mortgages carried adjustable rates.
As interest rates have risen this year, a growing number of consumers have opted for ARM loans, which carry lower rates than fixed-rate loans. This has led to a sharply rising share of the mortgage market for the thrifts, which specialize in adjustable-rate loans and often have a funding advantage.
Economists say they expect ARMs to maintain their popularity for the next several months.
"We are projecting ARM shares will go above 50% by the end of next year and into 1995," said David Lereah, economist at the Mortgage Bankers Association.
ARMs may comprise up to 55% of the market in the first half of next year, Mr. Lereah said.
Economist Robert Davis of the Savings and Community Bankers of America said he does not expect ARMs to gain much more ground, but expects ARM loans to remain popular next year.
"We may be nearing the high water mark for ARMs origination," said Mr. Davis. "I expect ARM originations to plateau soon, now or during the first quarter."
Thrifts continued to offer the most competitive start rates, and about three-quarters of their loans were ARMs.
The average start rate on ARM loans at thrifts was 6.64% in October. At mortgage banks, the average start rate was 7.97%, and at commercial banks, it was 7.51%. At banks, ARMS represent 51% of all loans, against just 22% a year ago, and mortgage companies managed to increase their proportion of adjustables to 39%, from just 7% a year earlier.
The finance board said, on average, the loans stayed at the start rates for longer periods than previous years.
ARMs originated in October adjusted, on average, in 35 months, compared to 25 months for ARMs in October 1993, and 16 months for ARMs made in October 1992.
The yield on one-year Treasury securities continued to be the dominant index for ARMs. In October, 64% of ARMs were linked to that index.
Next in popularity was the 11th District Cost-of-Funds Index. Sixteen percent of ARMs originated in October were linked to the COFI index.
