MBA increases 2004 origination forecast to $2.5 trillion.

THE MORTGAGE BANKERS ASSOCIATION (MBA) has revised its 2004 forecast for loan originations to $2.5 trillion, up from the $2 trillion previously forecast in January. The reason for the increase is a continued low-interest-rate environment that will result in a record high loan origination market

"Despite the strong pace of the economic recovery, interest rates have remained low for a variety of reasons. Some borrowers are responding to these rates by purchasing homes, and others are making up for missed opportunities to refinance," said Doug Duncan, MBA's senior vice president and chief economist.

MBA expects mortgages for home purchases will make up 54 percent of total originations, or $1.4 trillion. Refinancings, which have been boosted by falling interest rates, will post $1.1 trillion in originations. These numbers are up from the $1.1 trillion for total originations and $700 billion for refinancings previously forecast by MBA. In the revised forecast, refinancings will comprise 46 percent of originations in 2004. In comparison, refinancings in the only two years with originations higher than 2004 were 66 percent in 2003 and 62 percent in 2002. Adjustablerate mortgages (ARMs) make up 29 percent of the total $2.5 trillion forecast.

The key driver of the new forecast is MBA's revised outlook on interest rates. MBA now projects that the 10-year Treasury rate will average only 3.9 percent during the second quarter and 4.1 percent in the third quarter, with correspondingly low mortgage rates. For example, MBA expects the average 30-year fixed mortgage rate to dip to 5.4 percent in the second quarter and then increase slowly.

While the rebound in the economy has been strong, rates have remained low for several reasons, according to Duncan. "First, productivity gains and the effect of imports have held down inflation," he said. "Second, the increase in corporate profits has held down the need to fund new business expansion through debt. Third, and perhaps most importantly, the recovery in jobs has not been strong enough to drive up rates. Job growth has not been strong enough for the Fed to begin raising short-term interest rates anytime soon. The result is that investors who believed the very large spread between short-term and long-term rates would be narrowed by an increase in short-term rates this summer are now looking at a decline in long-term rates instead. Our forecast has, for some time, anticipated that the Fed would wait until late this year before starting to raise short-term interest rates."

MBA now forecasts housing starts for 2004 at 1.8 million (1.4 million for single-family homes and 349,000 for multifamily homes). Existing-home sales are expected to hit 5.8 million and new-home sales 1 million in 2004. The median price for existing homes is expected to be $176,100 and the median for new homes is expected to be $199,000.