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Long-Term Forecast Also Sees Lower Prepay Volume

MBA chief economist Douglas Duncan said in the association's recent long-term economic forecast that core inflation is likely to edge higher this year, but that it will remain contained.

Still, the MBA expects mortgage rates to edge modestly higher this year, leading to a 40% decline in home loan refinancing activity.

The MBA estimates that mortgage origination volume totaled $2.79 trillion in 2005. The association predicts that volume will drop by 19.5% to $2.24 trillion this year, with a decline in refinancing being the primary culprit, and expects only a modest decline in originations for home purchases.

The MBA expects the Federal Reserve Board's tightening of monetary policy to continue through March of this year to ensure that inflation remains under control. The MBA predicts that the Fed will halt the tightening cycle after two additional increases this year.

From a broader economic perspective, the MBA expects to continue seeing a flat yield curve environment. Already, the spread between rates on fixed-rate mortgage products and adjustable products has narrowed significantly. As a result, the MBA expects the share of adjustable-rate mortgages to decline through 2008.

The MBA expects the yield on 10-year Treasury notes will rise to 4.8% by the end of this year, remaining at that level through next year. The MBA's long-term forecast sees the 30-year, fixed-rate mortgage yield rising moderately to about 6.4% by the end of 2006.

"Long-term rates, albeit rising, will remain relatively low, supporting residential and commercial real estate finance activity," Mr. Duncan said.

While the MBA expects GDP growth of 3.5% this year, the trade group expects to see growth slow down in 2007 due to slowed consumption growth. Expecting inflation to remain contained, the MBA predicts that the Fed will lower the fed funds rate in late 2007.

The MBA predicts that the average 30-year mortgage rate will then drop to 6.1% by the end of 2008.

The MBA expects house price appreciation to moderate this year from the double-digit rates seen in recent years.

The MBA expects home sales volume to decline this year and next from the record-setting pace of 2005, a factor that will likely fuel fierce competition in the loan origination market.

SNAPSHOT: Forecast Sees Shrinking Refi Market

2005 Refi Volume $1.3 Trillion

2006 Refi Volume $784 Billion

2007 Refi Volume $685 Billion

2008 Refi Volume $886 Billion

Source: MBA. Numbers are estimates and projections.

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