The Mortgage Bankers Association cast additional gloom on an already sullen industry on Tuesday when it forecast that mortgage origination volume would decline by as much as 32% in 2014 – most of it in the form of declining refinancing volume.
MBA economists – who delivered the bleak prediction at a press breakfast held during the association's 100th Annual Convention & Expo in Washington, D.C. – said rising interest rates and a weak job market are the main factors that will precipitate a massive drop in refinance volume next year.
MBA Chief Economist Jay Brinkmann said interest rates for 30-year, fixed-rate mortgages will 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.’
The origination of new loans, however, is expected to increase next year. The MBA forecasts that purchase originations will increase by 9% to $723 billion, up from $661 billion in 2013.
However, this will not be enough to offset the 57% decline in refinancings, which are forecast to drop to $463 billion from $1.08 trillion in 2013.
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.
The projected increase in new originations is based mainly on economic data showing that the U.S. economy will continue to improve in 2014. Based on jobs market data and other indicators, the MBA projects overall economic growth will increase to 2.4% in 2014 and 2.7% in 2015.
‘Our expectation is that the economy will grow somewhat faster in the second half of 2014,’ Brinkmann said. ‘The 10-Year Treasury rate is expected to stay below 3 percent for the remainder of 2013 and into early 2014, but then increase more rapidly in the second half of 2014 as the Fed tapers its asset purchases and subsequently phases out the third round of quantitative easing.’
Brinkmann said the MBA now expects the Fed to begin tapering its asset purchases in early 2014 and will wind down its bond-buying program by September 2014.
In addition, the MBA forecasts that the Fed funds rate will be kept near zero until mid 2015, ‘when we expect to see the first fed funds rate increase,’ he said.
Mike Fratantoni, vice president for single-family research and economics, said unemployment is expected to trend downward due to falling labor force participation, with job growth in the range of 150,000 to 170,000 jobs per month. "We expect the unemployment rate will decrease to 6.9 percent in 2014 and 6.5 in 2015," he said.
Looking on the bright side, the MBA's data shows that independent mortgage bankers will gain more market share in 2014, particularly with regard to new originations.
Brinkmann noted that 40% of purchase volume was originated by independent mortgage companies in 2012, up from 36% in 2011.