The origination of new mortgages is expected to continue to drop through 2007, according to a report issued at the Mortgage Bankers Association (MBA) at the end of October 2006. The report stated that when 2006 is done, mortgage sales will have slipped nineteen percent over the year previous. Nevertheless, 2006 will maintain a position as the fifth highest year on record for new mortgages.
The report recognized the last five years of home sales as being an unsustainable pace and characterized current circumstances as the beginning of a normalization period. In raw numbers, mortgage origination was at the $ three trillion mark or above in each of the last three years (2003 - 2005) and hit its peak at $3.9 trillion in 2003. From that perspective, it appears that mortgage sales began to taper a couple of years ago. The production of
The MBA sees 2007 mortgage creations totaling $2.12 trillion in 2007 and holding at that level in 2008. That�s an interesting, long-view analysis from a source of expertise that is more likely to deliver a disinterested viewpoint than the market analysts that read thuds and crashes into every change in the prime rate. It shows a mortgage market that is, the sale of new loans that will have decreased by 46 percent over a four year period from January 2003 through December 2007. Further, the report suggests that the decreased level of mortgage sales will remain in place for the ensuing year, implying that the lower figure is closer to a normalized mortgage market. In the meantime, mortgage rates are continuing to drop, down again at the end of October to 6.36% on a thirty year fixed loan. So the interest rates continue to invite refinancing, and the number of ARMs scheduled to adjust in the next two years would seem to invite substantial refinancing. Nevertheless, the MBA�s expectations are for a protracted downturn.
The MBA estimates that between $1.1 trillion and $1.5 trillion of ARMs will be up for adjustment in 2007, compared to the $400 billion that reset this year. Their prediction is that $600 billion to $700 billion of those loans will likely refinance, while $500 billion to $800 billion will reset. While these estimates have extremely wide parameters, it is worth noting that the MBA sees something like half of all ARMs moving into maturity and being retained by the homeowners that hold them. That is in contradiction to the predictions that the widespread distribution of interest only and option ARMs will lead to disruption of the mortgage market. It is also encouraging, in the face of warnings issued about these loans by mortgage reinsurers and new guidelines about their use issued by the FDIC. It�s probably worth considering the source on this issue, particularly with regard to the successful retention of reset ARMs and substantially higher mortgage payments by tens of millions of homeowners.
The MBA does acknowledge that delinquencies and foreclosures will be on the rise, although they are not forecasting any rate of increase in their report. They do note that how the ARMs play out could have a significant impact on the mortgage market, and predict that ARMs will drop to 19 percent of all mortgages issued in 2008, as compared to 30 percent at the beginning of 2006.
By Bobby Heavens
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