Like many in the mortgage industry, analysts at Keefe, Bruyette & Woods are projecting a decline in originations in 2011, the result of refinance activity declining after many borrowers refinanced to the historically low rates of 2009 and 2010. That depressed level of refi activity will remain for some time, part of the “new normal,” the industry will have to adjust to, said Bose George, KBW’s senior vice president of equity research.
KBW projects residential mortgage originations will total $1.3 trillion in 2011, down from its estimated $1.5 trillion in 2010. That’s level with Freddie Mac’s 2011 projection, but more optimistic than the Mortgage Bankers Association and Fannie Mae, which expect total origination volume to be $996 billion and $1.18 trillion, respectively.
With interest rates expected to increase modestly in 2011, borrowers that recently refinanced won’t find an opportunity to improve their rate anytime soon. And the type of home price increases that would afford homeowners the opportunity to take equity out of their home with a cash-out refinance mortgage—and entice them to give up their extremely low interest rate—are years away.
George said even the mortgages modified under the federal government’s Home Affordable Modification Program and lien holders’ proprietary loss mitigation programs won’t likely be a source of new refinance activity because most modification agreements include fixed interest rates.
In HAMP, the interest rate can change if the modified rate is below Freddie Mac’s weekly mortgage rate survey on the date the agreement is prepared. But increases don’t begin until five years after the modification is established and are raised in increments of up to one percentage point per year until it reaches the level equal to Freddie Mac’s survey at the time of the modification.
For example, based on the latest reading of the Freddie Mac survey that put the average rate for a 30-year fixed-rate mortgage at 4.61%, a borrower offered a HAMP modification that includes the lowest possible 2% interest rate would see their rate stay at that level until 2015, then increase to 4.61% over a minimum of three years. George said if the mod is still performing at that time, it’s unlikely the borrower would refi.
Refis won’t increase until home prices take a material climb. KBW expects prices to come in flat for 2010 and remain level in 2011. Prices and sales will continue to be affected by an estimated 2.09 million real estate owned properties needing to be liquidated, the foreclosure process dragging out from an average 251 days in 2008 to 492 days in 2010 and a shadow inventory of up to 5 million properties.
