ARMs' Share Kept Growing In January, But Dip Is Foreseen

WASHINGTON - Adjustable-rate mortgages continued to gain popularity in January, making up 59% of all mortgages closed that month.

That was up from a 55% share in November and December, according to numbers maintained by the Federal Housing Finance Board.

The new increase was something of a surprise, as many analysts had expected ARMs to tail off soon. And indications of a coming decline remain, the analysts said.

January's share of ARMs was the highest since November 1988, when 60% of all home loans carried variable rates.

In January 1994, only 24% of home loans were ARMs.

Consumers have flocked to adjustable-rate mortgages since early last year, as rates rose and fixed-rate loans became less affordable.

As the difference between long-term and short-term rates has narrowed in the last couple of months, analysts have predicted that ARMs will lose market share.

Keith Gumbinger, an analyst with HSH Associates, said January's share gain by ARMs was likely to be one of the last. The numbers reflect loans closed in January, but applied for in November, Mr. Gumbinger said.

Back then, the spread between short and long rates was about 3%. It has since narrowed to about 2.25%.

As a result, Mr. Gumbinger said he expected February's numbers would show ARMs are leveling off in their appeal to consumers.

As in previous months, ARMs with long adjustment periods dominated the landscape. The average ARM closed in January will not be adjusted for 30 months, according to the finance board.

In January, ARMs linked to one-year Treasuries, which were the most popular ARMs, will not adjust, on average, for the first 37 months.

Thrifts and banks led in ARM production.

Eighty-one percent of loans made by thrifts in January were ARMs. For banks, 69% of all loans in January were ARMs, and for mortgages banks, that number was 44%.

The average rate on fixed rate loans in January was 9.02%, up 0.2% from the previous month.

The average rate on ARMs was 6.95%, up 0.12% from December 1994.

January's rate on fixed rate loans was nearly 2% higher than a year ago. The rate on ARMs was 1.5% higher than January 1994.