Refinancing May Hit 60% Mark This Year

The chief economist of the Mortgage Bankers Association of America weighed in with his forecast of the originations market for this year, bringing his estimate up to $2.6 trillion.

Douglas Duncan, speaking at the group's National Secondary Market Conference here, noted there is a wide divergence among predictors of where the market will be.

He expects the refinancing share of all lending activity this year to slightly exceed last year's record.

On the high side, David Berson, chief economist of Fannie Mae, is calling for a $3.2 trillion year. His counterpart at Freddie Mac, Frank Nothaft, just issued a report predicting a $2.54 trillion year. U.S. Bancorp Piper Jaffray analyst Robert Napoli's most recent estimate is $2.25 trillion.

Mr. Duncan did project a scenario where his forecast could be low. He sees interest rates remaining flat for the rest of this year. If the president's economic stimulus package does not go through, then he said his projection is low and "I'll be wrong for the right reasons."

On the other hand, if the whole stimulus package is approved (the current forecast takes into account about half of the package going into effect, as well as the $75 billion proposed funding for military action in Iraq), then he is "overestimating" this year's volume.

From the macroeconomic perspective, if the stimulus package is approved, it could have an effect on the mortgage market as corporations increase their demand for credit. This demand will drive up mortgage interest rates.

Mr. Duncan predicts rates for the 30-year, fixed-rate loan to go from 5.8% in the first quarter up to 6.3% by the end of the year.

Origination volume is estimated at $757 billion for the first quarter, $873 billion for the second and $662 billion for the third. He projects the market will tank in the fourth quarter, with a volume estimate of $335 billion.

Refinancings should fall throughout the year, from 71% in the first quarter, 65% in the second, and 54% in the third to 33% in the fourth. For the year, they will be at 60%, which is actually higher than the 57% posted in 2001 and 59% posted last year.

Mr. Duncan addressed the issue of have consumers taken on too much debt, as some observers have claimed. He noted that much of the added debt burden has come about as the percentage of homeownership has increased among Americans.

The added mortgage debt is close to equal the amount of rent many were paying. However rent is not figured into personal debt loads.

He declared that he has not found any evidence of this country going into recession because consumers have taken on too much debt.

There is no question to MBA economists that house price appreciation will slow by the fourth quarter of this year.

However, Mr. Duncan is in the camp of economists that believe there is no housing bubble. It is a function of supply and demand.

He further said that he did not expect nominal home prices to fall for the full year. That has never happened in the past, although prices have at times declined over a three-month period.

Sales of existing homes will decline throughout the year. For 2003, home sales will be at a seasonally adjusted rate of 5.579 million, spurred on by a strong market in the first half of the year. This is slightly higher than the rate of 5.567 million for 2002.

Mr. Duncan talked of the possibility of a 50 basis point cut in the Federal Funds Rate by the Federal Reserve Board taking place before the next scheduled meeting. However, he believes the Fed will wait until the May meeting before the next cut.

Regarding credit quality, the view is that people should be attentive but not concerned. Delinquencies peaked two quarters ago, he noted.

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