DOW JONES NEWSWIRES

The share of mortgage applications for adjustable-rate mortgages fell to 3% in December - the lowest in 25 years of recordkeeping - as the initial rates on ARMs were often above 30-year fixed rates, according to Freddie Mac (FRE).

The government mortgage giant, which was placed into conservatorship by the federal government in September after the company was left holding the bag when mortgages they backed soured, said the rates on 30-year fixed mortgages were at 50-year lows.

Freddie Mac Vice President and Chief Economist Frank Nothaft said the traditional ARM, which adjusts its rate annually, was found at one in five lenders last year, the lowest percentage recorded in the survey's 25 years.

During 2008, the Federal Reserve cut its key federal funds rate by more than four percentage points to a range of 0% to 0.25%. In addition, a large flow of investment funds to Treasury bills pushed their benchmark yields to historic lows.

Meanwhile, annually adjusting ARM rates fell just 0.6 percentage points during the year.

"Because ARMs generally have interest-rate or payment caps that limit payment adjustment, initial rates on ARMs did not decline as much as yields on one- or three-year Treasury securities," Nothaft said. "Further, heightened uncertainty over future interest-rate levels and expectations of home-value declines in many markets likely added to the premium above fully-indexed rates across all ARM products."

December's 3% application rate was a tiny fraction of peak months in 2000, 2004, 2005 and 1995 of around 36% of total mortgage applications. Even homeowners who refinanced avoided ARMs.

ARMs contributed greatly to the housing market crisis: homeowners were comfortable with initial low payments but suddenly found themselves unable to pay once the low teaser rates expired and the payments jumped. That contributed to the rising foreclosure rate and sharp decline in home sales.

-By Kerry E. Grace, Dow Jones Newswires; 201-938-5089; kerry.grace@dowjones.com

Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary. You can use this link on the day this article is published and the following day.