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Experts Forecast Fewer Fundings as Rates Expected to End 2004 at 6.4%

May 21, 2004

MBA, Fannie economists lower projections for 2004 production

By Coco Salaza

After increasing their projections for this year's mortgage volume every month since January, economists for two industry organizations have reduced their estimates due to the rising rate environment. It is also expected adjustable-rate mortgages will keep rising in popularity and comprise over a third of the record purchase volume anticipated in 2004.

In its monthly update of the mortgage finance market for the month of May, the Mortgage Bankers Association of America (MBA) said it is projecting $2.42 trillion in mortgage originations this year, down from last month's prediction of $2.57 trillion.

"Because of strong employment growth in March and April, rising inflation pressures and solid production growth, the Federal Reserve is likely to begin raising rates in June," said MBA chief economist Doug Duncan in a statement. The Washington, D.C. group previously forecasted the Fed would wait until August before starting to raise short-term interest rates. But, Duncan said the growth of the economy has accelerated and raised the likelihood of a near-term rate increase.

Fannie Mae economists, David Berson and Orawin Velz, said in their May monthly economic and mortgage market update, that there is high consensus among the market that the Fed's rate committee will increase the federal funds rate -- currently at 1% -- by 25 basis points in its June meeting.

MBA said it projects that the 10-year Treasury rate will be at 4.9% in the last quarter of the year, up from last month's prediction of 4.3%. With mortgage rates increasing correspondingly, the group expects the average 30-year fixed mortgage rate to rise to 6.4% in the fourth quarter, up from the previously forecasted 5.8%.

Berson and Velz estimated that mortgage originations will total $2.3 trillion, down from April's prediction of $2.58 trillion.

In January, MBA estimated mortgage originations would total $1.99 trillion in 2004 and Fannie forecasted $1.79 trillion. Both groups increased their predictions each month since then and their current estimates are closer to the totals they gave in March of $2.49 trillion and $2.43 trillion, respectively.

Because interest rates are increasing at a faster pace than previously forecasted, MBA said it anticipates refinance originations will fall to $1.0 trillion, down from the previous estimate of $1.2 trillion. Purchase originations will make up 57% of total originations, or $1.4 trillion.

In line with MBA, Fannie's economists' expect total originations to amount to $2.3 trillion, with purchase originations reaching a new all-time high of $1.3 trillion.

MBA reported that the volume of adjustable-rate mortgages (ARMs) will likely rise as more households choose to use them to manage affordability, and that ARMs will comprise about 33% of the total number of conventional purchase loans. Fannie expects the share to be around 35%.


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