The number of homeowners refinancing mortgages is likely to drop sharply over the next three years, falling to a quarter of residential loan originations in 2007 as interest rates rise, the Mortgage Bankers Association said in its annual forecast.
Refinancing made up 44 percent of loan originations last year, as Americans took advantage of low interest rates, the association said.
Long-term mortgage rates, which averaged 5.8 percent for 30-year, fixed rate mortgages in 2004, should increase modestly to about 6.2 percent by the end of the year and reach about 7 percent by the end of 2007, the MBA said in its report.
"These are very modest interest rate increases for the level of economic growth we are expecting," said Doug Duncan, association chief economist and senior vice president of research and business development.
The association is forecasting $983 billion worth of refinance loans this year, down from $1.3 trillion last year. The group predicts that refinancing will slide to $689 billion in 2006 and $559 billion in 2007.
But rising rates should not dampen total mortgage production, which the association expects to reach $2.54 trillion this year. That would equal the total in 2002, the third-biggest year ever.
Fannie Mae, a private financial services corporation and the nation's largest source of financing for home mortgages, also is expecting a sharp fall-off, with 40 percent fewer refinancing loans this year. Mortgage refinancing hit an all-time high in 2003.
"You'll have a drastic decline in refinance originations," said Orawin Velz, a senior economist for Fannie Mae. "People need rates to go down quite a bit to incite them to do a refi. If it goes down only 5 or 10 basis points, it's not going to cover a lot of hassles."
The modest increase in rates will be driven by increased borrowing demand, a lower dollar and continued tightening by the Federal Reserve, David W. Berson, chief economist for Fannie Mae, said in the company's outlook for this year. Fannie Mae expects mortgage rates to rise to 6.35 percent by year's end.
"When you compare that to historical rates, that's very affordable," Velz said. "But in terms of home sales going forward, we already have the fourth consecutive record-high year of home sales, so there's not a lot of pent-up demand for housing. And when rates go up higher, affordability will decline."
Still, the mortgage bankers' group expects only a modest slowdown in home sales.
