WASHINGTON --Consumers, seeking refuge from the rising cost of fixed-rate loans, are continuing their rapid shift to adjustable-rate mortages. ARMs represented 46% of the market in September, the highest in more than five years.

What's more, the number appears to be headed higher. Now that rates on 30-year fixed mortgages have climbed past 9% and double-digit rates are in sight, experts say ARMs will soon make up more than half the market.

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"ARM share is rising with the deterioration of housing affordability," said Mark Zandi, chief economist at Regional Financial Associates in West Chester, Penn.

"People are finding it harder to afford a fixed-rate loan, so they're shifting down to ARMs where rates are still affordable," he said.

Adjustable-rate loans could capture more than half the market "anytime," Mr. Zandi said.

But he expects ARMs will slip back below the 50% mark next spring or summer as their price advantage over fixed-rate loans erodes.

However short-lived it may prove to be, the dominance of ARMs will clearly prolong the edge that portfolio lenders are enjoying over mortgage banks, which had flourished during the fixed-rate refinancing boom.

"I know a year ago the nonbanks were beating the brains out of banks," said Marc C. Smith, president and CEO of Crestar Mortgage Corp. "Now the complaints are from nonbanks."

Indeed, large, well-capitalized portfolio lenders are doing record business.

For example, the nation's third-largest thrift, American Savings, expects to take in $1 billion in applications this month.

That's the "highest we have ever had in our history," said Mario Antoci, chairman of the company.

Thrift portfolios, which stagnated during the fixed-rate refinance boom, have "a chance to grow again," Mr. Antoci said.

Meanwhile, mortgage bankers have resorted to brokering deals for thrifts and banks just to keep their loan officers working.

"We've become a broker for savings and loans," said Rick L. McGuire, executive vice president of Inland Mortgage Corp. in Indianapolis.

"They set a price, and we originate for them," Mr. McGuire said. But his company earns only a small fee, 1% of the loan balance, instead of a stream of servicing income.

One-fifth of Inland's business this year will consist of loans originated for thrifts, Mr. McGuire said.

Overall, business will be down sharply this year, $3 billion compared with $4.3 billion last year, he said.

With access to cheap deposits, banks and thrifts can finance ARMs more cheaply than the secondary market agencies, and are pricing them aggressively.

The rates for ARM loans bought by Fannie Mae and Freddie Mac are "not even close" to those offered by banks and thrifts, said T. Donnell Smith, executive vice president, Market Street Mortgage, Clearwater, Fla.

Beyond aggressive marketing and their affordability, lenders and economists cite several reasons why ARMs are strong. They are bolstered by the new popularity of hybrid products whose rates remain fixed for several years, these experts say.

Half of all adjustable-rate mortgages do not adjust until after the first year, estimated Keith Gumbinger, an analyst at HSH Associates in Butler, N.J.

Loans whose rates remain fixed for the first five, seven, or 10 years are "basically fixed rate for the consumer," Mr. Gumbinger said.

A so-called 10/1 ARM, whose rate adjusts 10 years after it is made, was being offered at 8.53% last week, compared with a 30-year fixed-rate loan at 9.17%.

Consumers are betting that they will have the chance to refinance that loan and lock in lower rates at least once or twice in the next 10 years, Mr. Gumbinger said.

Also bolstering the demand for ARMs is the fact that the California housing market, where thrifts and ARMs have the greatest strength, has started to rebound.

"The fact that the action [in the housing market] has shifted away from the Midwest has propped up the ARM share," said Mr. Zandi.

"As good as the last couple of years were, it now seems [mortgage bankers] are paying the price for it," said Mr. Mcguire.

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