Adjustable rate mortgages have grown unpopular. As recently as 2005, they made up about 36% off new mortgages, now they make up only about 7% of new mortgages, and offer just a 0.5 percentage point interest rate advantage over fixed rate mortgages, with little room for the rate to fall and a high probability that the rate will rise before the term ends.
One factor is that borrowers want to lock into current low interest rates. Another is that the Federal Reserve has been buying up vast amounts of mortgage backed securities to prop up that market, but has limited its purchases to securities backed by fixed rate mortgages.
The current rarity of the ARM coincides with the continued virtual unavailability of loans on subprime and Alt-A terms. Market forces, backstopped by, but not really driven by modest government intervention, have returned us to an older, simpler world of mortgage finance.
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