2003 mortgage originations likely to break record set in '02

The Mortgage Bankers Association of America announced that as a result of the continued drop in interest rates, it now believes mortgage originations for 2003 will total $3.3 trillion, far exceeding the origination record of $2.5 trillion set in 2002.

In its latest Mortgage Finance Forecast, released June 18, MBA estimated that 68 percent of the $3.3 trillion will be loans to refinance existing mortgages. The total dollar volume of mortgages for home purchases is expected to reach $1.07 trillion by the end of 2003, up 5 percent from $1.02 trillion in 2002.

Some of the increase in the volume is due to higher home prices and average mortgage amounts, but in addition, about 6.8 million single-family units are expected to be sold this year, a 3.5 percent increase over 2002.

The surge in refinancings has been driven by falling interest rates. The average effective rate on 30-year fixed-rate mortgages has fallen by about half a percent in MBA's Weekly Survey of Mortgage Applications, and Freddie Mac's rate survey shows a similar drop.

In the MBA Applications Survey, 79 percent of all conventional loan applications were refinancings.

"The Federal Reserve on May 6 indicated its concern over the possibility of deflation, and the financial markets responded by pushing down interest rates on long-term Treasuries and mortgage instruments," said Doug Duncan, MBA's senior vice president and chief economist.

Duncan correctly predicted the Federal Reserve would cut the federal funds rate target by at least 25 basis points at its June 25 meeting. He believes the Fed will not raise the short-term rates until the middle of next year.

"While a cut on the overnight fed funds target rate would have no direct effect on mortgages, the signal that such a cut would send would be that the Fed continues to be concerned about a sluggish recovery and that inflation fears are minimal. This, combined with weak corporate demand for debt financing, should hold down any significant increases in rates though the end of the year," Duncan said.