Conventional adjustable-rate mortgage originations this year will total less than $200 billion, or only about 15% of all originations, according to Freddie Mac's annual survey. ARMs were 22% of all originations in 1997.

Falling rates have made the loans less popular with consumers, but Freddie says the product has evolved since it was introduced in the early 1980s, helping adjustable-rate lenders hang onto some market share.

The main tactic has been to extend the initial adjustment period. According to the survey, mortgages with rates that adjust every year dominated the market five years ago. But today eight of 10 lenders offer ARMs that have fixed rates for the first three years, whereas just three of 10 lenders offered such a product in 1993. Five-, seven-, and 10-year initial-fixed-rate periods are also available.

Still, borrowers are more inclined to lock in fixed rates.

In 1993 more than one-third of ARM borrowers who refinanced chose lower- rate adjustable mortgages. In this year's third quarter, Freddie Mac said, adjustable-rate borrowers chose to refinance into 30-year fixed-rate mortgages 67% of the time, and 22% opted for a 15-year fixed rate.

"If lenders had not lengthened the fixed-rate period of ARMs, we would have seen even greater falloff in ARM activity," said Frank Nothaft, deputy chief economist at Freddie Mac. He projected a "continuation of a very low interest rate market, which is very conducive to fixed-rate mortgages. I expect ARMs to remain at the same rate."

Typically, ARM borrowers are more mobile and economically flexible, according to Douglas Duncan, director of research for the Mortgage Bankers Association.

"Thrifts have a distinctive advantage in originating ARMs, because they protect them from the short- and long-term interest rate troubles they got into in the '70s," Mr. Duncan said.

He said mortgage banking companies stand to gain the most when ARM originations decline because they never hold that type of loan in their portfolio.

The association's forecast for 1998 is for $1.29 trillion of single- family residential loans, with refinancings accounting for 44% of the total.

Mr. Duncan estimated that only 11% of the total volume will be ARMs. The MBA's projection is lower than that of Freddie and Fannie, Mr. Duncan said, because the government-sponsored enterprises "can't buy jumbo loans or anything that is not A-(rated) credit. So their surveys do not represent the entire market."

Stephen Bartus, director of consumer sales for Citicorp Mortgage, said most lenders want a mix of fixed- and adjustable-rate mortgages in their portfolios for protection from moves in the market in any direction.

"ARMs adjust to keep pace with the market. ... There will always be a segment of the market that will want ARMs," Mr. Bartus said.

Though interest rates continue to fall, the variety of adjustment periods and lower initial rates keep ARMs at a viable level in the industry.

"With the uncertainty in the economic environment, fixed rates are attractive because people can lock in at a low rate if they are not planning to go anywhere for the next 20 or 30 years," Mr. Bartus said. "But if you know you are only going to be in a home for one to five years, why wouldn't you benefit from a lower rate of an ARM?"

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