2012: Another Tough Year for Originators

The chief economist of the Mortgage Bankers Association (MBA) told association members Tuesday that they are in for yet another tough year.  Jay Brinkmann, speaking at MBA's annual gathering in Chicago, laid out a litany of economic ills that will plague the industry through 2012.

Brinkmann expects mortgage originations to fall from an estimated $1.2 trillion in 2011 to $900 billion next year.  This will be driven by a significant decline in refinance originations which will not be offset by the expected slight uptick in purchase originations.

Brinkmann, the association's senior vice president for research and education, said the forecast calls for purchase originations to decrease to $400 billion this year from an estimated $472 billion in 2010.  Assuming that growth will continue to be slow, purchase originations will increase slightly to around $412 billion next year.  He estimates, however that, as the economy improves and home sales and prices rise, there could be an increase in purchase originations in 2013 to around $770 billion.  " A faster economic recovery led by the housing market would mean faster home price growth and more sales volume, increasing purchase originations somewhat," he said, "but would cut off refinance volume sooner than in our forecast."

Sales of existing homes will be flat, remaining near the 4.9 million unit pace both this year and next, then will increase to 5.2 million units in 2013.  New homes sales will also remain slow through 2012 but "will show some meaningful increases in 2013."

Home prices outside of the foreclosure market have stabilized and some markets are even showing year-over-year appreciation.  FHFA's repeat transactions measure which includes both distressed and non-distressed transactions will continue to decline to mid-2012 and then begin to increase, but that will vary by locality and home price.

Despite the low and still declining interest rates, refinance originations in 2011 will be down, falling to $783 billion from an estimated $1.1 billion in 2010.  There are fewer eligible borrowers left to refinance and that "burnout" is expected to continue through 2013 with refinance originations projected at $495 in 2012 and $332 billion in 2013.

The economist said that he expects mortgage rates are at or near their low points "but we have been wrong on this call before."  Fixed rates should average about 4.5 percent for the year and fall about one basis point in 2012 before climbing back up to 4.9 percent in 2013.  MBA's forecast assumes that the Federal Reserve maintains short-term rates near zero for the next two years and that mortgage-Treasury spreads remain wide. 

As to the overall economy, Brinkmann forecast real GDP growth at 1.3 percent this year, but growth in Q1 was 0.4 percent and has tracked higher each quarter. He expects 2012 to continue the pattern with growth of around 1.7 percent for the year.  A modest recovery in 2013 should drive growth to 2.4 percent.  He predicted that consumer spending on durable goods and business spending on new plants and equipment will keep the country from falling into a second recession but uncertainty about the country's economy and even more concern over events in Europe are still holding back recovery.  Europe which is or soon will be in recession could harm the US economy and drive us into a short and relatively mild recession.  "We do not," he said, "anticipate any actions out of Washington that would have a material impact on the economic outlook."

Unemployment will continue to climb until the second quarter of 2012, hitting 9.3 percent for the year and declining back to the current level of 9.1 percent in 2013.  "Even though both economic and job growth are in positive territory, they are still insufficient to lower the unemployment rate in the near term."

The uncertainty about the economy is not one-sided.  He pointed to a steady decline in the housing inventory and the shadow inventory as indications that a housing recovery could be more robust than expected and could spur faster overall growth.  "The odds of this scenario, however, are low and we think the most likely outcome is another year of frustratingly slow economic growth and stubbornly high unemployment."

"In summary, regardless of which path the economy and mortgage rates take, we are predicting another tough year, with origination volumes at their lowest point since 1997. Continued slow economic growth will mean that unemployment will remain elevated through 2012, which could slow the improvement in delinquency and foreclosure volumes, meaning that in addition to lower production volumes for the industry, mortgage servicers will also continue to be under pressure."