Mortgage Originations Expected to Rise, Refis to Fall

Mortgage Originations Expected to Rise, Refis to Fall
November 2, 2012

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)

The Mortgage Bankers Association expects to see $1.3 trillion in mortgage originations during 2013, largely driven by a spillover of refinances into the first half of the year.

The Federal Reserve could end up buying half of all mortgage originations during 2013, according to the MBA.

The MBA expects to see purchase originations climb to $585 billion in 2013, up from a revised estimate of $503 billion for 2012. By contrast, refinances are expected to fall to $785 billion in 2013, down from a revised estimate of $1.2 trillion in 2012.

“We expected 2012 originations to be front-loaded in the first half of the year, with refis falling off with rate increases. Instead we saw the refinance market grow during the year due to a combination of low rates, thanks to QE3 and slowing global growth because of continuing problems in Europe, and adjustments in the HARP and FHA refinance programs,” said Jay Brinkmann, MBA’s chief economist. “We expect 2013 refinance originations to play out like our original expectations for 2012, with a long tail of refis extending through the first half of the year followed by a rapid drop-off in the second half.”

16 Percent Increase

Brinkmann said the MBA expects a 16 percent increase in purchase originations in 2013 over 2012, with every quarter in 2013 exceeding the same quarter of 2012. He expects the increase will be driven “by continued modest growth in the economy, an increase in owner-occupied sales financed with mortgages as opposed to cash purchases by investors, an increase in new home sales and a small increase in average home prices.”

He cautioned the estimates assume changes in the regulatory environment during 2013 “are not unduly disruptive in terms of their constraints on available credit” and government entities including the Federal Housing Authority, Fannie Mae, and Freddie Mac “do not notably tighten their credit policies.”

FHA and other government programs accounted for 43 percent of purchase originations in 2011 and have been averaging 38 percent of purchase applications in 2012, he said.

Heavy Fed Involvement

“Mortgage [interest] rates are likely to stay below 4 percent through the middle of 2013, principally due to the announced ongoing purchases of mortgage-backed securities by the Federal Reserve under its QE3 program,” Brinkmann said. “The Fed has committed to buying $40 billion of agency MBS [mortgage-backed securities] per month until the labor market shows significant signs of improvement. Based on MBA’s originations estimate, the Fed will be buying 36 percent of all mortgages originated in 2013, and a much higher percentage of those swapped into agency MBS.

“Given our expectation that originations will be front-loaded in the first half of 2013, the Fed’s purchases during the second half of 2013 could approach 50 percent of all mortgages originated in the last six months of the year, obviously with the effect of holding down rates, although there is a possibility that the Fed could shift into Treasury securities before the end of 2013.”

The MBA’s originations forecast “is based on expectations of very modest increases in economic growth in 2013 relative to 2012, but growth nonetheless,” he said.

The MBA expects gross domestic product to rise 2.0 percent in 2013 versus only 1.6 percent in 2012, about equal to the growth rate in 2011 but well below the 3.1 percent growth rate of 2010.

“The growth will be driven by a combination of the biggest annual increase in residential fixed investment we have seen since 1992, as well as small increases in consumer spending and business investment,” Brinkmann said.

‘Stubbornly High’ Unemployment

The MBA expects the unemployment rate to remain around 8 percent until the middle of 2013, before falling to 7.8 percent by the end of the year.

“The broader measures of unemployment that are most predictive of the demand for housing are likely to remain stubbornly high,” Brinkmann said. “Private sector job growth is likely to remain in the 125,000 to 150,000 per month range, and while this would result in an additional 1.5 to 1.8 million private sector jobs created during 2013, that growth is well below what we need for a robust market in home sales, construction, and purchase originations.”

Even these tepid expectations could cool, he said, because of “the dead weight of uncertainty” over how threats to the economy will be resolved. The most immediate threat is the so-called ‘fiscal cliff,’ when tax increases and spending cuts are scheduled to go into effect on January 1 unless Congress and White House reach an agreement to avert them.

Fiscal Fears

“The tax increases in particular would be devastating to economic growth,” Brinkmann said. “We believe that the entire package of tax increases and spending cuts, if left unaltered, would cut 3.5 to 4 percentage points from our growth forecast.”

“While the fiscal cliff is the most immediate threat, it is at least one we can control. The others are primarily international and pose longer-term headwinds for the U.S. economy. These include the ongoing economic slowdown in the European economies and how the fiscal problems in southern Europe will be resolved; the slowdown in growth in China and the cascading impacts on Japan, Taiwan, Australia, New Zealand and the countries of southeast Asia; and the prospects of a war involving Iran and Israel and the response of the other countries in the Middle East and the impact on world oil prices.”

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)