Subprime Share of Mortgage Market to Rise

With strong economic growth expected this year as the Gross Domestic Product is projected to grow 4.3%, rates will rise during the latter half of the year, said Doug Duncan — the chief economist for the Mortgage Bankers Association of America (MBA). Consequently, industry mortgage origination volume is expected to fall to $1.9 trillion in 2004 — a far cry from the all-time record of $3.8 trillion in 2003 — the group reported.

However, even though subprime residential originations are expected to follow the overall market trend (a decline in refinancings and an incline in purchase loans), the share of subprime originations are expected to increase because unlike conforming borrowers, subprime borrowers are less rate sensitive.

Subprime volume is expected to reach within the $355 billion to $371 billion range this year, surpassing 2003’s level of $323 billion, said SMR Research Corp. vice president George Yacik, in an e-mailed statement to MortgageDaily.com.

The predictions coincide with the subprime lending trend over the past three years. After reaching a peak in 1999 at about $165 billion, subprime originations tumbled to $140 billion in 2000, but have grown each year since then, MBA reported.

Meanwhile, the home equity market, which operates in the subprime world, has also seen substantial growth and is expected to grow further. According to statistics from the National Home Equity Mortgage Association, home equity originations exceeded $200 billion in 2002. A year later, home equity volume surged to $327 billion and it is expected to reach $370 billion, according to Yacik.

The Consumer Bankers Association recently surveyed 32 banking thrifts and said that although 96% of the institutions reported they had home equity loans to customers with credit scores under 630, subprime loans represented only 7% of home equity lines last year, compared to 13% in 2002. For home equity loans, 16% were subprime loans, while the previous year 18% were.

Nonetheless, “subprime lenders should continue to see strong demand for their product in the secondary market this year,” even though the overall mortgage market outlook is not so good, according to an Inside B&C Lending newsletter released in January.

The subprime news publication reported that securities backed by subprime mortgages reached record volume of $202.86 billion last year, a 50.8% increase from $134.54 billion in 2002.

The top subprime lenders who may see further demand in their products include, New Century Financial Corp., which was reportedly the top lender in the third quarter last year with subprime volume of $8.6 billion — a 125% increase compared to the same period a year earlier. Household Financial Services followed with $7.2 billion, CitiFinancial ranked third with $6.5 billion, First Franklin Financial originated $6.0 billion and in the fifth spot was Countrywide Financial Corp with $5.5 billion.

The subprime sector should do reasonably well, but performance in 2004 depends on how the individual company executes, analyst Bob Napoli recently told MortgageDaily.com. Napoli, from Piper Jaffray — a Chicago firm that tracks subprime operations within some of top companies — said the biggest risk factor in the market is “whether competition remains rational or gets greedy and [companies] shoot for the fences at the expense of pricing and discipline.” In this case, earnings growth for the more disciplined firms would be affected and further concentration of the market share could be exhibited among the top subprime lenders.