The Mortgage Bankers Association has lowered its forecast of mortgage originations in 2009 to $2.03 trillion, a drop of over $700 billion from its March forecast. $84 billion of the drop is due to lower purchase originations and the rest is due to lower rate/term refinancings and very low volumes in the Fannie Mae and Freddie Mac Home Affordable Refinance Program (HARP). MBA is now forecasting $737 billion in purchase originations and $1,297 billion in refinance originations.
In announcing the drop in the forecast, MBA's Chief Economist Jay Brinkmann issued the following statement:
"In March we boosted our forecast of mortgage originations by over $800 billion following the drop in interest rates associated with the Federal Reserve's announcement on the Treasury bond and mortgage-backed securities (MBS) purchases programs as well as the implementation of HARP. We warned at the time that with the billions in Treasury securities that would be issued to finance record budget deficits and with the Fed expected to purchase only a portion of those Treasury securities, how long rates stayed low would depend on whether other investors stayed in the market. If other investors shied away from Treasuries due to expectations of future inflation and the declining value of the dollar, the effect on rates would be more short-lived and our mortgage originations forecast would prove too optimistic. That has proven to be the case.
"While the Fed has been successful in reducing the spread between conforming mortgage and Treasury rates through its purchase of agency MBS, it has not been successful in maintaining lower Treasury yields. Since March, the Federal Reserve purchases have equaled approximately 85% of new MBS issuance for Fannie Mae, Freddie Mac and Ginnie Mae combined. In contrast, Federal Reserve purchases of long-term Treasuries equaled about 50% on new issuance during that same three month period. Given the high issuance volume of Treasuries in June, the Fed is likely approaching its self-imposed ceiling of $300 billion and may be reluctant to increase its current commitment to purchase long-term Treasuries for two reasons. First, Fed officials have made public statements about their outlook for an improving economy. Second, the Fed may have decided that its purchases may not be efficacious in maintaining lower long-term Treasury rates and may not be worth the risks entailed in building up a large Fed balance sheet that will need to be reduced at some future point.
"The March increase in refinance originations was driven by two factors. The first factor was the drop in interest rates. The subsequent increase in interest rates, however, began to choke off the refinance wave in May, much earlier than anticipated in the March forecast. The second factor was the large volume of loans expected from HARP. While generally accepted estimates were that around 1.5 to 2 million borrowers might avail themselves of this program, with many more potentially eligible, to date only about 13,000 loans have been completed according to press reports. While the number of loans completed under this program is likely to increase, it is difficult to craft a scenario under which origination volumes would come anywhere close to reaching the numbers originally envisioned for the program, particularly under our higher rate environment.
"MBA had estimated that purchase mortgage originations in 2009 would be $821 billion. We have now lowered this to $737 billion for several reasons. First, while home sales have been higher than expected, home prices have fallen more than expected leading to smaller loans. Second, the large share of distressed sales or homes purchased by investors has resulted in the share of all cash home purchases being higher than normal. Therefore, even with higher projected home sales for all of 2009, the projected lower average home price and higher cash share have combined to lower projected volume of purchase originations.
"MBA now projects that total existing home sales for 2009 will be 4.8 million units, a drop of 1.2 percent from 2008. MBA projects new home sales will be 352,000 units, a decline of about 27 percent from 2008. Median home prices for new and existing homes will likely continue to fall, dropping by about ten percent from 2008 levels, but leveling off in 2010 as the economy improves.
"There are several schools of thought about where long-term interest rates are headed. One school holds that continued anemic growth and high unemployment will combine to hold down inflation and the demand for debt. The increase in government debt has been partially offset by declines in other forms of debt, especially mortgage and other consumer debt. The result will be long-term interest rates at approximately current levels through the end of 2010. Another school of thought holds that the large increases in federal debt will put tremendous pressure on domestic and international investors to absorb this debt, and that the large increases in the money supply and declines in the dollar could trigger inflation, all leading to higher rates. The MBA forecast is for increasing rates through the end of the year and through 2010. Adding to the pressure for higher long-term Treasury yields is the notion that, at some point, the Fed has to withdraw the substantial liquidity it has injected into the financial markets to keep a lid on expected inflation. On the other hand, a resumption of a flight to quality, induced by political unrests around the globe or a renewed financial crisis, could cause long-term Treasury yields to reverse their course."
For more information, visit www.mortgagebankers.org.