Refinances Seen Dropping More Than 50 percent in 2014

The Mortgage Bankers Association (MBA) might not have been smiling as it prepared the economic forecast for 2014 it handed out today. The association's economists say they expect the volume of mortgage originations to drop by 32 percent next year as rising numbers of purchase applications fail to compensate for the fall-off in refinancing.

MBA expects to see $1.2 trillion in originations in 2014 compared to a projected $1.7 trillion in 2013.  Purchase originations are projected to rise by 9 percent but refinancing originations will plummet by 57 percent. 

The $1.7 trillion projected for this year is a revision from $1.6 trillion forecast earlier based on new Home Mortgage Disclosure Act (HMDA) data.  Jay Brinkmann, MBA's Chief Economist and Senior Vice President for Research and Education said the data showed a higher share of originations going to independent mortgage lenders, particularly purchase mortgages.  In 2012, 40 percent of the purchase volume was originated by independent mortgage companies, up from 36 percent in 2011.

The dollar volume of purchase originations in 2014 will increase to $723 billion from $661 billion while refinancing volume will drop from $1.08 trillion to $463 billion.  In 2015 MBA expects purchase originations of $796 billion and a further decline in refinancing to $433 billion.

Brinkmann said MBA expects home purchase originations will increase in 2014 due largely to gains in home sales and home prices but also expects to see a decline in the share of sales paid for with cash.  He anticipates seeing higher average LTVs on purchase mortgages, due to the rise in home prices.

"We expect mortgage rates will increase above 5 percent in 2014 and then increase further to 5.3 percent by the end of 2015," he continued.  "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.  We will potentially see a small increase in refinances toward the end of 2015 as the Home Affordable Refinance Program 2.0 (HARP) 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.

"Our forecast for the increase in the purchase market is based on our expectations for ongoing improvements in the broader economy and the jobs market. We are projecting overall economic growth to be 2.4 percent in 2014 and 2.7 in 2015, supported mainly by increases in consumer spending and residential fixed investment.  GDP growth will remain relatively weak through the end of 2013 and early 2014, at around 2 percent, due to a variety of uncertainties, particularly over US spending and tax policies linked to the debt limit debate.  Our expectation is that the economy will grow somewhat faster in the second half of 2014 as some of these issues are resolved.

"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 (QE3).  We now expect the Fed to begin tapering its asset purchases in early 2014, and ending QE3 in September 2014. The Fed funds rate will be kept near zero until mid-2015, when we expect to see the first fed funds rate increase.

"Unemployment is expected to continue on a downward path due to falling labor force participation and 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 6.4 in 2015."

MBA's origination projections are a bit more pessimistic than those provided earlier this month by Freddie Mac and Fannie Mae.  Housing market forecasts from the two GSEs were very similar in most respects, projecting total originations for 2013 at about $1.8 trillion, slightly more than MBA. For 2014, Fannie Mae and Freddie Mac estimated originations of $1.36 and $1.40 trillion respectively.