Weak Mortgage Outlook

And some of the pain will continue into 2008.

“Total originations in 2007 are projected to decline by about 5 percent to $2.39 trillion from an estimated $2.51 trillion in 2006,” the association said in the 40-page report. “They should decline by an additional 4 percent to $2.29 trillion in 2008 as a result of a drop in refi originations of 10 percent.”

Purchase originations are expected to remain steady.

While refinances originations will decline by about 4 percent in 2007 to $1.06 trillion the drop in mortgage rates in the fourth quarter of last year the outlook is still promising in the early part of the year, the association forecasts.

“As a significant share of loans with adjustable rates will face their first reset in 2007, we expect that a portion of these loans will be refinanced into either fixed-rate mortgages or into other adjustable-rate mortgages … providing strong support for refi activity this year,” according to the report.

Delinquency rates are “evolving,” the association said, after increasing “across the board” in the third quarter of last year.

In the third, quarter more than 95 percent of borrowers were current on their mortgage, the association said. Delinquency rates were 4.67% of all loans, up 28 basis points from the second quarter and 23 BPS from a year ago.

The increase in delinquencies will likely peak by the end of 2007 “but at levels well below those of past peaks,” the association said.

“This lower peak will come despite the change in the composition of outstanding loans, namely a larger portion of subprime loans,” it said.

During the third quarter, delinquency rates for prime loans increased from 2.29% to 2.44%; from 11.70% to 12.56% for subprime; from 12.45% to 12.8% for FHA; and from 6.35% to 6.58% for VA loans.

The largest increase was in subprime ARM loans, which rose from 12.24 percent to 13.22 percent in the quarter.

Mississippi, Louisiana and Michigan led the nation with the highest overall delinquency rates; the highest foreclosure rates were in Ohio, Indiana and Michigan.

The association cautioned policymakers to avoid reading too much into the delinquencies and then reacting by making changes that would curtail certain types of lending.

“We have no evidence that the increases we have seen in delinquency and foreclosure rates are the result of non-traditional products such as interest only or payment option mortgages,” it says in the report. “We would strongly caution policymakers to avoid any regulatory or legislative actions that would impede the ability of the market to respond to changes in underlying economic conditions.”

Total mortgage originations in 2006 were the fifth highest ever. Fifty-five percent of new originations were fixed rated loans followed by adjustable rate (28%), interest only-ARM (14%) and interest only-fixed (3%).

“The subprime segment of the market has typically had a much higher share of adjustable-rate loans,” the association said. “In the first half of 2006, 67% of subprime originations were ARMs, with 17 percent of those being (interest only) ARMs.”

Loan origination activity has been on a breakneck pace in the last few years. More than 86% of outstanding loans have been originated since 2000. The proportion is even greater for subprime loans; 75 percent have been originated since 2003.

“The stock of outstanding mortgages is predominantly composed of young loans,” the association said. “Due to the strong housing markets of recent years, homeowners have built up a substantial buffer of home equity.

“Even though we anticipate somewhat weaker housing markets over the next couple of years … we do not expect any significant decline in overall mortgage credit quality, although there could be some further weakening in the subprime sector.”

Patrick Crowley is a feature journalist and blogger for MortgageDaily.com. He is also a reporter, blogger and columnist for The Cincinnati Enquirer.
e-mail Patrick at: PatCrowley@MortgageDaily.com