What to Expect from New Order as Purchases Reclaim Dominance

Increased rates should cause a significant falloff in mortgage refis next year. Image: Fotolia.

The Federal Reserve’s planned reduction in bond purchases will drive rates up 50 basis points over the course of 2014 as mortgage-backed securities spreads widen, agency forecasts say.

The expected drop in refinancing in 2014 would force originators to rely primarily on purchase lending for the first time in more than a decade.

The last time purchase money mortgages constituted more than half of the primary market was the year 2000, according to Frank Nothaft, VP and chief economist, Freddie Mac.

The purchase-refi origination mix will go from about 60%-40% on average for this year currently to 40%-60% on average for next year, according to Freddie’s forecast. Refis started this year above 70% in the first quarter and they are probably closer to 50% of the market now, says Nothaft.

It has been a long time since the market has been purchase dominated, but unlike this year at least the forecasted shift in the market’s mix next year will be expected.

The market had priced in the Fed’s 2014 tapering plan before it became formal, says Orawin Velz, Fannie Mae’s director of economics. The timing came earlier than some expected, but the tapering also turned out to be more gradual than some forecast.

Fannie estimates a projected decline to around $1.3 trillion in 2014 from $1.8 trillion, Freddie estimates a decline to around $1.1 trillion from $1.5 trillion and the Mortgage Bankers Association before the taper plan had forecast a 32% drop to $1.2 trillion. Freddie’s 2012 to 2013 estimated decline is just 10%.

“The drop in refis offsets any gain in purchase money” in the 2014 forecast, Nothaft says.

Purchases will likely pick up next year but the home price gains could be slower. They will be half of what they were percentage-wise this year at around 6%, according to Freddie’s outlook report.

Although volumes overall will almost certainly drop next year the extent of the decline is debatable, lenders asked to comment on the MBA’s forecast have said.

Refi projections are largely estimate-based until Home Mortgage Disclosure Act data are released with a considerable time lag so they are subject to change, Velz notes.

The other uncertainty lies in some lingering uncertainty when it comes to economic recovery, which has to continue to make progress in order for the Fed to follow through with its tapering.

The beginning of the Fed’s taper will be tough on lenders given the wave of new regulations they also will be starting to contend with in January. The combination of all these trends makes more industry consolidation and the concentration of mortgage risks among fewer players likely.

“‘Too big to fail’ is even more of a nightmare” as a result, says Steve Calk, chairman/CEO of the Federal Savings Bank and Chicago Bancorp.

"Those of us who have focused primarily on the purchase business are surviving and dare I say thriving, but I’ve seen a number of companies that are really suffering,” says Calk, who plans to selectively acquire mortgage companies in the coming year.

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