2005 Volume: $2.1 Trillion

Mortgage loan originations for 2004 should total $2.7 trillion, but decline to $2.1 trillion next year, according to the chief economist of the Mortgage Bankers Association.

Refinancings will make up 45% of this year's origination market but fall to 32% in 2005, said the economic forecast presented by MBA chief economist Doug Duncan and MBA vice president of research and economics Jay Brinkmann. The pair discussed the report at a special press briefing as well as at a general session at the group's annual convention here.

Mr. Duncan noted that the 10-year Treasury is currently trading at around or below the 4% range. Typically mortgages price 150 to 165 basis points above that. By the end of this year, the 10-year will be at 4.3% and the 30-year FRM at 5.9% and by the end of next year it will be up to 6.5%.

When asked about a possible bubble in home prices during the press briefing, Mr. Duncan noted that home sales are up, while the inventory of properties going on the market is down. That means there is a constraint on supply. It is hard to see where an across-the-board collapse will come from, although that doesn't mean there could be a decline in some markets, he said.

During the macro-economic part of the presentation, Mr. Duncan said while economic growth is strong, it is not "barn-burning." Therefore there is no pressure on the credit markets and rates will stay low.

Furthermore, the Federal Reserve has told the market it will raise short-term rates by 25 basis points in November and he said it would follow through. However, the MBA economists believe the Fed will then pause and not raise rates during the first quarter of 2005.

Mr. Brinkmann said that because the cost of mortgages has become so low, it is having an impact on the rental market, as renters are electing to become homebuyers. As a result, multifamily properties are seeing record vacancy rates.

There are more households being formed in the U.S. and those new households are moving quicker into the homebuying market than in the past.

Home sales will be down from the records being set this year, "but not by much," Mr. Brinkmann continued. Next year will be comparable to the levels of 2003 and better than 2002. Since the forecast was given before the election, Mr. Duncan was asked about the political risk.

While MBA runs its model neutral to political choice, "certainly" the election would have an impact as the two parties have a different economic viewpoint, he said.

Other things that could impact the forecast are terrorism and high oil prices.

Another event in the United States would have an impact on consumer confidence. But, he noted consumers weathered Sept. 11 very well and that Sept. 11 was not the primary cause for the recession that took place. Sustained oil prices above $70 per barrel could have an effect on consumer spending. Right now, he is looking to see what the current price range of between $50 and $60 per barrel has on consumer spending.

MBA pushed its origination forecast out to three years ahead. In 2006, it predicts $1.93 trillion in volume with 26% refis, while the following year it predicts just under $2 trillion, with 23% coming from refis.

The MBA is not the only organization that expects to see a decline in mortgage volume next year.

Economists at Freddie Mac recently updated their economic forecast, predicting that fixed-rate loans will gradually become more expensive next year, rising about one-half of a percentage point between now and the end of 2005.

After four years of heavy refinancing, the MBA estimates that fewer than one in seven fixed-rate borrowers today have an interest rate of 7% or higher.

The MBA estimates that the industry will originate about $2.7 trillion in home loans this year and $2.5 trillion next year.

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