The economic forecast for mortgage lenders is gloomy at best, according economists at the Mortgage Bankers Association.
The interest rate on 30-year mortgages "will approach double digits by the end of 1995," said David Lereah, the group's chief economist. "I expect the 30-year rate to top out at 9.8% by the end of next year."
In remarks at the industry's annual conference in Boston, he added that the rise in rates would be coming soon.
Lyle E. Gramley, a consulting economist for the MBA and a former Federal Reserve Board governor, expects the Fed to tighten its federal funds rate by 50 basis points on or before Nov. 15, with the possibility of another similar hike in December.
"It's a pretty lousy housing and lending outlook for the next 12 months," said Mr. Lereah. The rise in rates will stanch demand for mortgages, he said. The MBA is looking for a $605 billion home loan market in 1995. That's a 20% drop from the $760 billion projection for 1994 and more than 40% off the trillion-plus market lenders enjoyed last year.
Originations were stronger in the first half and 1995 looks to be a continuation of the weaker second half of 1994.
As has been the case this year, mortgage bankers will bear the brunt of the carnage in 1995. The rise in rates should continue to feed consumers' predilection for adjustable-rate mortgages. Adjustables will account for 45% of home lending next year, according to Mr. Lereah, up from 32% in 1994.
Since portfolio lenders have been able to offer adjustables at lower rates than Fannie Mae and Freddie Mac, that trend will put them at an increasing disadvantage.
"If the Fed raises rates it will be a major blow, volumes will definitely drop," said Mark Mozilo, a principal of Keros-Mozilo Mortgage and son of Angelo Mozilo of Countrywide Credit Industries.
That assessment is borne out by the market share prognostications of the MBA.
Mortgage bankers should capture 47% to 48% of the market next year, down from 58% in the first quarter of 1994 and 50% for the entire year.
There is one bright spot in the outlook, though it may be some way off. Short term rates will rise about a point further than the long bond, according to Mr. Gramley.
Many consumers took out adjustable-rate loans this year that are tied to short-term rates and will soon reset from their super-low starting rates. That adds up to the potential for a refinancing boomlet, as consumers feel the pinch of adjustables and move into fixed-rate loans.
Settling Down
The MBA expects the mortgage market to stabilize in the next year. Here are its projections:
Originations, in billions: 2nd'94 half '95$760 $286 $605
Market share: Adjustable rate mortgages '94 32% '95 45% Refinancing '94 21% '95 11% Mortgage banks '94 50% '95 47%-48%
Source: Mortgage Bankers Association
