Mortgage originations: it's a local story.

One of the hot topics in the press right now is the real estate market and mortgage origination volumes. Will mortgage originations fall off; will asset quality worsen; which markets will be problematic; and how can we tell? These are all tough questions that do not have easy answers, but there

The chart below, using quarterly survey data from the Mortgage Bankers Association, shows that purchase originations, as measured by dollar volume, grew steadily from 2001 through the end of 2005. The steady growth trend extends itself well back into the early 1990's, so it is reasonable to expect that the mean behavior will extend into the future.

The chart also shows that refinancing activity peaked in the third quarter of 2003 and was relatively steady through the end of 2005. Mid-2003 was marked by some of the lowest interest rates ever seen by the mortgage market, so the refinance trend is understandable. Compared to the bulk of the 1990's, refinance activity is still at a relatively high level, but in line with projected, average behavior.

More recently, mid-2005 showed an uptick in both purchase and refinance originations that anecdotally may have been the last gasp of the real estate boom.

A return to the mean behavior scenario suggests that on the national level originations may fall off in the short term, but long term they will remain solid. On the local level, however, the story may be different. Home Mortgage Disclosure Act (HMDA) data provide an insightful view into the regional trends.

For example, the data show that in the Jacksonville, Fla., area originations for nonoccupant mortgages in 2005 was 15.93% on a number basis, or 16.56% on a dollar volume basis, up from 9.55% and 9.05% in 2003, respectively. This suggests that the market may have an overabundance of investment properties relative to primary dwellings. This in turn suggests that the Jacksonville market may be in for rough times if the real estate bubble bursts.

Contrasting Jacksonville is the Minneapolis area, where nonoccupant originations represented 7.21% of the number of originations, and 6.77% by dollar volume in 2005. In 2003 the numbers were 3.38% and 3.19% respectively, so while there was an uptick, the overall volume was much less than in Jacksonville.

Minneapolis experienced a peak in origination activity in 2003 with 357,650 originations worth $58 billion, the bulk of which--265,183 loans representing $42 billion--were refinancing transactions. In 2004 and 2005 these numbers leveled off with roughly 200,000 originations each year, representing roughly $35 billion in loan value. The level of refinance activity was flat across that time at about 100,000 originations (or $18 billion) per year. This suggests that the driver of mortgage originations were homeowners and not speculators. So this market may be less vulnerable to a downturn than others.

San Diego, the setting of many house-flipping TV shows, experienced a slight uptick in nonoccupant originations from 2003 to 2005, from 8.19% to 10.20% by the number of loans in each year respectively. The refinance bubble was a big factor in 2003 for San Diego. The area had 246,951 refinancings worth $60 billion in 2003, which represented the bulk of the 320,698 originations worth $80 billion. In 2004 and 2005 refinances, while still outpacing home purchases, fell to $39 billion and $38 billion respectively. The recent stability suggests that San Diego may be able to ride out any significant national real estate downturn.

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--John McCune, SNL Financial jmccune@snlfinancial.com