The Mortgage Bankers Association (MBA) has increased its forecast of mortgage originations in 2009 by over $800 billion. The MBA now expects originations to total $2.78 trillion, which would make 2009 the fourth highest originations year on record, behind only 2002, 2003, 2005.
This boost is due entirely to the expected increase in mortgage refinancing activity motivated by the drop in interest rates following the Federal Reserve's announcement last week on the Treasury bond and mortgage-backed securities purchases programs and the Fannie Mae and Freddie Mac refinance programs. In its weekly mortgage applications survey, the MBA found that refinance applications increased an unadjusted 41.5% from the week before.
The MBA also lowered slightly its forecast of mortgage originations tied to home purchases.
"While the Fed has not announced that it is targeting specific rates for either 10-year Treasury rates or rates on 30-year fixed-rate mortgages, the effect of having the Fed bid in the market for a sustained period is enough to create a refinance incentive for a tremendous number of homeowners," says Jay Brinkmann, the association's chief economist and senior vice president of research and economics. "The vast majority of mortgages originated before the latter part of 2008 are probably going to have at least a 50 basis point refinance incentive for at least the next several months, with mortgage rates hitting lows not seen since the early 1950s and late 1940s."
The previous record origination years of 2002, 2003 and 2005 had large amounts of subprime loans and jumbo loans. In contrast, the 2009 originations will be almost entirely Fannie Mae and Freddie Mac-eligible loans, or loans eligible for Federal Housing Administration insurance.
The MBA estimates that refinancings in 2008 totaled $765 billion and were forecast to increase to $1.13 trillion in 2009. With the recent moves by the Federal Reserve and the Fannie/Freddie program, refinancings are expected to reach $1.96 trillion.
In contrast, the MBA estimates that purchase mortgage originations in 2008 totaled $854 billion, and were forecast to fall slightly to $851 billion in 2009. The new MBA estimate for 2009 is $821 billion, driven by a combination of continued declines in home sales and lower prices on the homes that are sold, leading to smaller mortgages on average than in recent years.
"Even with amazingly low interest rates, lower home prices and the first-time home buyers tax credit, it is unlikely that we will see an increase in overall home sales until we see some stabilization of employment," Brinkmann says.
The MBA projects that total existing-home sales for 2009 will drop 2.5% from 2008 to 4.8 million units. New home sales will decline about 39% in 2009 from 2008 to 293,000 units. Median home prices for new and existing homes will continue to fall, dropping by about 5% to 6% from 2008 levels.
Brinkmann adds that the origination levels will pose numerous capacity-related challenges for mortgage banking firms.
"First, the reduced availability of warehouse lines of credit could limit the ability of a number of independent mortgage bankers to handle this volume in a short period of time," he says. "Second, the capacity burdens will be borne by the retail channel of loan officers working out of branch offices as the mortgage broker channel for originations is considerably diminished since the last refinance wave. Third, the epidemic of fraud against lenders over the last several years is leading to closer scrutiny of documentation and appraisals. Fourth, loan servicers that were already burdened with loan delinquencies and workouts are going to be faced with massive churn in their portfolios as old loans are paid off and new loans booked."