Consumer preference for ARMs differs significantly by region.

Statistics for the nation as a whole say that adjustable-rate mortgages are out of favor with borrowers these days.

According to the Federal Housing Finance Board, adjustables accounted for just 23% of mortgages closed in the second quarter.

But that doesn't tell the whole story, because there are significant regional differences in consumer preference for ARMs.

Two Extremes

In Honolulu, for example, two-thirds of all second-quarter closings were ARMs, and the number was even higher in the first quarter, 84%.

At the other extreme, folks in Salt Lake City utterly turned up their noses at adjustables, which accounted for only 4% of the market there in the second quarter, down from 10% in the first quarter. In the third quarter of 1992, no adjustable-rate loans were recorded.

Regional Pattern

One doesn't have to look very far, though, for at least a partial explanation of this peculiar regional pattern.

Honolulu also had the highest average home purchase price in the 50 states, about $287,000 in the second half. The lower-rate adjustables make the large monthly mortgage payments easier to handle.

But there is also a regional pattern, with ARMS having the most popularity on the West Coast, where thrifts, which prefer to write adjustables, are still a major marketing force.

Shaking Up the Credit Markets

To the public, the weekly index of mortgage applications compiled by the Mortgage Bankers Association may seem like a fairly obscure number.

But that number apparently shook up the credit markets for a time last week.

As shown in the table above, the MBA's refi index surged to an all-time high. This alarmed investors in mortgage-backed bonds, who feared an acceleration of prepayments that would diminish the value of their holdings.

Even recently issued bonds with the lowest interest coupons appear to be vulnerable to prepayment. Many lenders report their customers are refinancing to save as little as 75 basis points as the refi process gets easier, more efficient, and less expensive.

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