Mortgage bankers see continued subprime consolidation, slow adoption of wholly online lending and declining residential originations. But the commercial mortgage market is seen as a bright spot.
Doug Duncan, chief economist for the Mortgage Bankers Association, said 2007 should be a healthy year for real estate and real estate markets.
Speaking at a press briefing Tuesday, he predicted the housing slowdown will end in mid-year 2007 and that the economy will experience a soft landing.
Duncan said the Federal Reserve will keep the federal funds rate steady at the current 5.25 percent. The rates on fixed-rate mortgages are about 6.2 percent. Duncan expects long-term rates to rise modestly this year, helping to cushion the decline in residential housing activity that will continue through mid-2007.
“The 30-year fixed-rate mortgage yield should trend modestly higher over the first half of the year, reaching 6.5 percent by the third quarter and edging up just slightly through 2009,” Duncan said in a written statement. “Thus, interest rates will still be quite low by historical standards.”
Existing- and new-home sales for 2007 will decline, while both are projected to rebound in 2008 and increase slightly in 2009. Existing home appreciation is expected to slow significantly over the next three years, while median prices should remain relatively flat for both new and existing homes.
The group estimated total residential production in 2007 will be $2.39 trillion — declining by about 5 percent from an estimated $2.51 trillion in 2006. Total mortgage originations should decline an additional 4 percent to $2.29 trillion in 2008 and drop another 6 percent to $2.15 trillion in 2009.
Residential mortgage originations for purchase loans will reach to $1.33 trillion in 2007 and will remain flat in 2008, according to MBA. Refinances will total $1.06 trillion in 2007 then decline to $957 billion in 2008. For 2009, purchase originations should edge up slightly while refinance originations should decline to about $800 billion.
The strain of excess capacity is showing up in sharply reduced profits, merger activity and workforce reduction, the economist predicted. Such reduction will hold the payroll growth in 2007 to a slightly lower pace than 2006.
Duncan said nonprime lending production will be lower because the upward movement of interest rates will push marginal credit borrowers off the eligible ladder and because the regulatory guidance makes lenders more conservative.
And as investors learn about changes taking place in the performance of asset-backed securities and as spreads widen, pricing for nonprime borrowers has been pushed up. The result will be some decline in nonprime market, which represents 13 to 14 percent, he said.
Duncan explained the subprime sector is in the second wave of maturation.
The first phase was in 1998 when the collapse of Long Term Capital, the Asian currency crisis and Russian bond default caused a flight to quality that dramatically widened spreads in capital markets for subprime lenders — putting many out of business.
Subsequently, the capital that replaced them was in the form of well-capitalized financial institutions, and those institutions have been in place since 2000.
He said competitive pressures of those firms against the sole operators those firms only in the subprime arena are likely to surface — leading to the second wave in the maturing of that market.
One way to measure that is to look at risk-adjusted after tax rate of return to capital in prime lending versus subprime lending. Duncan said that spread has narrowed — which means the subprime market is becoming more and more efficient. Any time there is downturn, the more inefficient players leave the field.
Mortgage technology panelists didn’t expect online lending to storm the market any time soon.
Duncan said wholly online lending — where a borrower uses their PDA or home computer to get a mortgage, never having seen or met with anyone and data not having been re-entered somewhere along the way — hasn’t yet happened.
John Robbins, chairman of MBA and CEO of Wachovia Securities-subsidiary American Mortgage Network Corp., said consumers use the Internet to obtain rates, products and programs and the availability of them but follow through in person to argue for a better price or a particular product.
And, data security is a significant worry for consumers.
Robbins said he doesn’t think the Internet experience will manifest itself until the data security issues have been solved and the average American consumer is persuaded that the information they put into the Internet is protected.
Neither sees that sector taking off in the next several years. Duncan said there are unlikely to be many such loans in the next three years. Although, he admitted that a significant number of refinance applications involve a significant online component, he reminded that those loans still did not involve a wholly-online experience.
Robbins added that wholly-online applications have not hit the numbers bandied about five years ago. In fact, he said, it hasn’t even come close to those projections.
Duncan said MBA has two subsidiary corporations studying online lending. One focuses on the standards and essential elements of electronic mortgages and has 2000 industry volunteers and 40-plus workgroups working on those online issues. The other, he said, is focused on how security would be provided to online transactions.
Combating the growing problem of mortgage fraud is also on the association’s 2007 agenda. MBA will once again seek $6.25 million in dedicated funding for 30 new Federal Bureau of Investigation field investigators, two new dedicated prosecutors at the Department of Justice to coordinate prosecution efforts with the U.S. Attorney’s Office and$750,000 to support the operations of FBI Interagency Task Forces in the areas with the 15 highest concentrations of mortgage fraud.
In response to one question, Duncan said increased levels of fraud are being detected as a result of the decline in performance currently being registered in securities backed by mortgages. Although, he added, that it is tough to get good empirical data, because, “you don’t state your fraud upfront,” he said.
Commercial real estate activity remains a bright spot, he explained, calling that sector a “beautiful combination” of low delinquencies, available capital, no overbuilding and improving fundamentals on the earning side for income producing properties.
