With recession still expected, MBA cuts origination forecast

The Mortgage Bankers Association reduced its origination forecast for 2023 from the previous month, but it is holding to its outlook for a recession starting in the second half of the year.

Mortgage originations should be in the area of $1.79 trillion this year, down from $1.81 trillion in May's forecast, Chief Economist Mike Fratantoni said during the group's Single-family Research and Economics Showcase on Wednesday. However, it increased the purchase portion to $1.4 trillion, versus the previous $1.38 trillion.

But the outlook for refinancings was cut to $391 billion from $428 billion.

The year-to-year drop in dollar volume is expected to be about 20%, from $2.45 trillion. The amount of units produced is expected to drop 26%, to 4.38 million from 5.91 million, a result of higher home prices.

The MBA also continues to forecast that mortgage rates will end the year at around 5.8%. The organization differs in its outlook from Freddie Mac's latest outlook in two ways; the government-sponsored enterprise continues with a no-recession baseline and it believes rates will remain above 6% this year.

The organization's Weekly Application Survey released earlier on Wednesday found the conforming 30-year fixed at 6.73%, down 4 basis points from the previous week.

Federal Reserve observers have been debating whether the decision not to raise rates was either a pause or a skip. Fratantoni said there are indications that the Fed was considering two more rate hikes this year.

"So this is really looking much more like a political dynamic within the FOMC than an economic discussion," Fratantoni said. "This seemed like perhaps a bargain where they said well, let's show that we're willing to hike more if inflation doesn't come down, but we're not going to hike today, which is kind of a curious result to come to."

Even if a 25 basis point rate hike takes place in July, he expects the FOMC to hold the line throughout the rest of this year, with the first cuts coming in 2024.

When it comes to long-term rates like the 30-year fixed rate mortgage and the 10-year Treasury yield, the market is already acting in anticipation of that shift from a Fed that is hiking to one that is cutting rates, "because we saw the peaks in those two rates in third quarter, early fourth quarter of 2022 and [they] have begun to trend down," Fratantoni said. "We think they will continue to trend down over the remainder of this year and next year, particularly given the economic slowdown."

What gives him confidence in that outlook is the current 97 basis point inversion between the 2-year and 10-year yields. When the Fed indicates it will start cutting rates, the former will start dropping quickly, returning to a more normal environment.

As for the outsized spreads between the 10-year Treasury and 30-year FRM remaining in place for an extended period of time, one reason is likely the Fed's reduction of its balance sheet, which is putting some upward pressure on rates. Another reason is that banks, which had been putting much of their mortgage production on their books because it made sense in a low interest rate environment, are now feeling pressure, especially following the latest round of bank failures. Mortgage-backed securities sales from these banks are also pushing yields higher.

"That's led to a tremendous amount of interest rate volatility," Fratantoni said. "Higher rate volatility leads to higher mortgage backed security yields, that's the sort of night follows day."

But the spreads between mortgages and Treasurys don't have to come all the way down to a more normal 170-180 basis points. If it only closes to about 250 basis points, it would be enough to get to that 5.8% forecast, as Treasury yields should also move down, he said.