MBA Lowers 2009 Originations Forecast To $2.03 Trillion

By Anuradha Kher, Online News Editor Washington, D.C.–The Mortgage Bankers Association recently lowered its forecast of mortgage originations in 2009 to $2.03 trillion, a drop of over $700 billion from its March forecast. The $84 billion 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. MBA’s Chief Economist Jay Brinkmann explained, “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.” The Fed has been successful in reducing the spread between conforming mortgage and Treasury rates through its purchase of agency MBS, but it has not been successful in maintaining lower Treasury yields. Since March, the Federal Reserve purchases have equaled approximately 85 percent 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 percent 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,” says Brinkman. The March increase in refinance originations was driven by two factors, according to MBA. “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. But it has 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,” says Brinkmann. 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.