The Federal Reserve’s initiatives to keep mortgage rates down are spurring a rush to refinance that will test the operational capacity of lenders, but low rates won’t translate into higher home sales unless unemployment stabilizes, the Mortgage Bankers Association said today.
The MBA has dramatically revised its forecast for 2009 mortgage refinancings, saying it expects lenders will fund $1.96 trillion in refinance loans this year.
That’s an $824 billion increase from last month’s forecast, when the MBA said it expected $1.13 trillion in refinancings in 2009. Last year, by comparison, lenders refinanced only $765 billion in loans.
Driving the rush to refinance are mortgage rates not seen since the early 1950s and 1940s, said Jay Brinkmann, MBA’s chief economist.
Most homeowners with mortgages originated before the second half of 2008 are going to have at least a 50-basis-point incentive to refinance for several months or more, Brinkmann said (100 basis points equals 1 percent).
The Obama administration has estimated that as many as 5 million homeowners will be able to refinance mortgages owned or guaranteed by Fannie Mae and Freddie Mac in coming years through its "Making Home Affordable" initiative.
But Brinkmann doesn’t see low rates translating into increased home sales until the economy regains its footing.
"Even with amazingly low interest rates, lower home prices and the first-time homebuyer tax credit, it is unlikely that we will see an increase in overall home sales until we see some stabilization of employment," Brinkmann said in a statement.
The MBA has lowered its expectations for 2009 purchase-mortgage originations to $821 billion, down from $851 billion a month ago.
At this time last year, the MBA was forecasting $934 billion in purchase-mortgage originations, and for sales of existing homes to rebound to 5 million. The latest estimate reflects continued declines in home sales and lower prices, leading to smaller mortgages on average than in recent years, the MBA said.
Sales of existing homes are now projected to fall 2.5 percent from 2008 levels, to 4.79 million. Last month, the MBA was projecting 4.91 million existing-home sales in 2009. (The National Association of Realtors currently forecasts that sales of existing homes will hit 4.93 million this year.)
While the MBA’s projections for purchase mortgages continue to fall, the refi boom is expected to push total mortgage originations to $2.78 trillion in 2009, which would be the fourth-highest total on record. Refinancings would account for 69 percent of mortgage originations, compared with about 50 percent in recent years. …CONTINUED
Demand for refinancing will test the operational capacity of some lenders, Brinkmann said. Many have shut down warehouse lending operations that funded loans originated by independent mortgage brokers, so much of the demand will be handled by loan officers working out of branch offices. An "epidemic of fraud" against lenders in recent years means applications are being more carefully scrutinized, he said.
Also, loan servicers who are already juggling loan delinquencies and workouts are now going to be faced "with massive churn in their portfolios" as old loans are paid off, Brinkmann said.
While the mortgage origination records set in 2002, 2003 and 2005 included large amounts of subprime loans and jumbo loans, the MBA forecasts that 2009 originations will be almost entirely loans eligible for purchase or guarantee by Fannie Mae and Freddie Mac, or the FHA loan guarantee program.
The secondary market for mortgage-backed securities (MBS) that once funded most subprime and jumbo lending has yet to return. But the Federal Reserve has committed to purchase up to $1.25 trillion in MBS backed by Fannie, Freddie and Ginnie Mae, which securitizes FHA loans (see story).
The MBA revised its forecast for mortgage refinancings to reflect the drop in interest rates following last week’s announcement by the Fed that it was expanding the program by $750 billion, and that it would also buy up to $300 billion in 10-year Treasurys in the next six months.
In addition, the Fed doubled a previous commitment to buy $100 billion in debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks, bringing the total expansion of the Fed’s balance sheet to $1.15 trillion.
The unprecedented loosening of monetary policy, along with burgeoning government debt, could spur inflation and devalue the dollar, which ultimately could send long-term rates back up.
Brinkmann said that with billions in Treasurys to be issued this year to finance record budget deficits, the effect of the Fed’s purchases on rates will largely be determined by whether other investors stay in the market or shy away from Treasurys because of fears of future inflation.
If that happens, the effect of the Fed’s MBS and Treasury purchases on long-term interest rates will be more short-lived, and MBA’s revised refinance forecast could prove too optimistic, Brinkmann said.
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