Mortgage Industry Outlook

A panel of five industry economists from member companies of the Homeownership Alliance provided predictions for 2005 earlier this month. The chief economists included David Seiders of the National Association of Home Builders, Paul Merski of Independent Community Bankers, David Berson from Fannie Mae and Frank Nothaft from Freddie Mac.

Strong economic growth is anticipated throughout the year in the presence of low inflation with above trend growth in GDP, resulting in continued strength in employment and higher wages. The consensus was that job gains will average around 200,000 per month in 2005.

The group expects short-term interest rates will see more of a rise than long-term rates. The economists’ predictions for the 30-year fixed-rate mortgage by the end of the year ranged from 6.25% on the low end to 6.75% on the high side of expectations.

Merski of the ICB said bankers expect the 1-year Treasury-indexed adjustable-rate mortgage will end the year at 5.3%, while Fannie’s latest forecast has it ending at 4.9% and then in 2006 at 5.2%. Merski believed ARMs would account for 40% of the mortgage lending market, while Nothaft said the share of ARMs will be down to about one-third in the second half of 2005 with the 5/1 hybrid ARM being the most popular in the adjustable-rate arena.

In its mortgage market outlook through 2007 released Thursday, the Mortgage Bankers Association has one-to four-family mortgage originations down to $2.5 trillion in 2005 from the estimated nearly $2.9 trillion last year, and declining to $2.2 trillion and $2.1 trillion in 2006 and 2007, respectively.

Fannie’s Berson said he expects originations to total $2.1 trillion this year for the fourth best year ever and Fannie’s January forecast has the volume at $1.8 trillion in 2006. Freddie’s latest forecast has originations at $2.4 trillion and nearly $2.2 trillion in 2005 and 2006, respectively.

The consensus was that refinances will account for 35% to 40% of this year’s total originations. Freddie’s Nothaft predicts that about 75% to 80% of this year’s refinance loans will have a cashout component, unlike previous years when refinancing was mainly being done to lock in a lower rate or shorter term.

The strong employment forecast isn’t expected to spill over into mortgage employment, according to the MBAs chief economist, Doug Duncan — who expects the industry will see its ranks come down from current record levels.

Mortgage employers “have been trying to hold on to maintain market share as volumes fall,” Duncan explained. “This will reverse itself in 2005 as consolidation will start to move.” Historical evidence has shown that industry employment falls 15% to 18% from its peak in refinance cycles and if this were to hold true for the current interest rate cycle, “which will take a couple of years to complete, we might see somewhere in the neighborhood of 80,000 job losses.” However, with continued strength in the purchase market, “it might not be that significant,” he added.

Merski said bankers expect continued strength in home equity lending, which went up about 10% to 12% in recent quarters. Nothaft highlighted that over the year ending Sept. 30, 2004, approximately 20% of single-family mortgage debt growth has been due to growth in home equity lines of credit and loans, but that consumers’ appetite for tapping into their home equity for cash through a HELOC or second lien loan will dampen as the year progresses because of the rise in interest rates.

The group struggled to predict subprime activity because what may be considered subprime today may not be in the future. But MBAs Duncan said that in 2004, volume within companies that cast themselves as primarily lending to subprime credit qualities was $400 billion, or about 14% share of overall originations. He said subprime lending would probably stay somewhere in the 12% to 15% range.

Freddie’s Nothaft commented, “I don’t see necessarily the subprime share of the market growing and taking over the mortgage market in coming years. I think we’ll probably see some stabilization in that share going forward.”