Sharp decline in refis is seen

Interest-rate rise expected to reduce loans' popularity

Forecast by mortgage bankers

Drop from 44% of total to 25% expected by 2007

February 06, 2005|By Lorraine Mirabella | Lorraine Mirabella,SUN STAFF

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.

Sales of previously owned homes, which reached record levels last year, are expected to fall 7.2 percent this year, 7 percent next year and about 1 percent in 2007, as rising rates make homes less affordable. Even so, 2007 sales would mirror the record sales in 2002.

The National Association of Realtors is also forecasting a cooling off of home sales this year but still expects a strong market. The association expects 6.48 million homes to sell this year, which would be the second-best year ever.

Some of the decline in home sales will result from investors' leaving the housing market as price appreciation slows, Velz said.

But the housing market is expected to get a boost from strong growth in gross domestic product and a stronger job market, Duncan said. He expects the unemployment rate to decline from the current 5.4 percent to about 5.2 percent by the middle of 2007.

Ed Powell, vice president and consumer officer for Lending Tree, an online lending and realty service that connects consumers to lenders, said he expects 5 percent to 10 percent growth in his company's purchase loans this year, a slightly slower pace than in 2004.

Refinancing loans are expected to decline by 5 percent to 10 percent this year, Powell said.

"Interest rates clearly are a component of the slowdown in refinancing," he said. "If you're just trying to lower your monthly payments, it starts to not make sense for many people. What you will see is continued cash-out refinancing. Say you have a consumer who bought for a house for $300,000 that's now worth $500,000, and they have car loans and credit and kids going off to college. You can refinance a lot of debt with a 5.5 percent to 6 percent loan. That business will still be healthy as long as property values continue to appreciate."

Home prices, which have soared in the Mid-Atlantic region and were projected to be up about 10 percent nationally last year, are expected to grow more slowly, with increases of 4.7 percent for previously owned homes this year and 3.7 percent for new homes. For next year and 2007, the mortgage bankers are looking for price increases of 3 percent to 4 percent.

Duncan said consumer savings have dipped to historic lows but that "consumers are not overburdened by debt. They are reacting to the low cost of debt."

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