The country's largest secondary lender revised its predictions for 2003's mortgage production volume.
In his weekly commentary, Fannie Mae's chief economist David W. Berson revised the company's previous projection of $3.7 trillion in originations downward to $3.4 million.
According to the statement, the lower projection is a direct result of recent downturn in refinancing activity, which is tied to the skyrocketing fixed-term mortgage rates.
"Given the higher mortgage rates, about 39 percent of mortgages outstanding are in the money (profitable to be refinanced) compared with 90 percent not much more than a month ago. As a result, refinance activity has dropped significantly, and it appears that the prolonged refinancing boom may very well be on its last leg," the statement said.
Several factors were cited as contributing factors to rising rates. In addition to an uptick in gross domestic product growth, the weekly outlook for Fannie Mae mentioned that the manufacturing industry is also showing signs of a rebound.
Other factors cited in rising rates during the last week in June include "certain investors unwinding poorly placed bets on the yield curves and hedging activity from mortgage investors faced with investments that were extending in duration as interest rates rose."
The report also said "At times last week, there was panic selling in the U.S. fixed income market, and liquidity was quite thin."
The Weekly Economic Outlook, published Monday, also forewarned that if mortgage rates continue to remain at their current levels, originations could drop by half in the next calendar year.
"...we would expect one-to-four family mortgage originations to fall by about half to $1.7 trillion in 2004, as refinance originations would plunge sharply," the statement said.
The economists at Fannie Mae, however, see signs that the long-term fixed rates may not hover on their current plateau.
"As investors regain their perspective and look more to the economic fundamentals and less to the technicals, it would not be surprising if long-term rates come down a bit in the weeks ahead," the outlook said.
Also, employment numbers released last week show that the job situation is still faltering, a sign that the economic recovery may not be churning along.