During its annual conference and expo held in Washington, D.C., this past October, the Mortgage Bankers Association (MBA) issued a rather gloomy forecast for the mortgage industry: Origination volume was expected to decrease about 32% in 2014, reaching $1.2 trillion, compared to $1.7 trillion in 2013, due mainly to rising interest rates.
At the time, the MBA said although new purchase loans were anticipated to increase by about 9%, it would not be enough to offset the anticipated 57% decline in refinances.
Today, the MBA revised down its forecast for 2014 by another $57 billion. Mortgage originations are now anticipated to reach $1.12 trillion for the year – a decrease of about 35% compared to 2013 – as purchase loan volume will not be as robust.
‘Despite an economic outlook of steady growth and a recovering job market, mortgage applications have been decreasing – likely due to a combination of rising rates and regulatory implementation, specifically the new qualified mortgage rule,’ said Mike Fratantoni, chief economist for the MBA, in a statement. ‘As a result, we have lowered our expectations for both purchase and refinance originations in the first half of 2014.Â Purchase originations are now expected to be $677 billion for 2014, compared to $711 billion forecast previously. Compared to 2013, purchase originations are expected to increase by 3.8 percent.’
Refinance originations are now expected to be $440 billion in 2014, compared to the previous estimate of $463 billion. The updated refinance total is about 60% lower than 2013 refinance originations.
Rising interest rates, rising home prices and a weak job market are the main factors that will precipitate a massive drop in origination volume this year. In October, Brinkmann forecast that interest rates for 30-year, fixed-rate mortgages would likely top 5% by the end of 2014, and may increase to 5.5% by the end of 2015.
‘As a result, mortgage refinancing will continue to drop, and borrowers seeking to tap the equity in their homes will be more likely to rely on home equity seconds rather than cash-out refinances,’ he said. ‘We will potentially see a small increase in refinances toward the end of 2015 as the Home Affordable Refinance Program (HARP) 2.0 expires, but HARP activity during 2014 will still be low. While on paper the number of HARP-eligible borrowers appears large, the reality is these borrowers have been unresponsive to numerous attempts to encourage them to participate in the program and are less likely to do so now that rates have gone up.’
Interestingly, rising home prices can simultaneously stimulate and depress the market. For example, many homeowners who have been saving money in order to trade up to a larger home are now in a better position to do so, thanks to increasing equity in their current homes. On the other hand, homeowners who have very little equity in their homes and limited financial resources will, in effect, be ‘priced out’ of the market, due to higher prices.