Even with the housing market stabilizing and a settlement between megaservicers and state AGs on the horizon, the mortgage industry shouldn't expect an increase in originations next year, according to a new forecast from Keefe, Bruyette & Woods.

KBW director of research Frederick Cannon on Friday said he expects the note rate on the 10-year Treasury to rise next year, predicting that the Federal Reserve will not purchase enough MBS to keep mortgage rates from rising to 4.7% by the fourth quarter of 2012.

"We think the 10-year will drift up next year" to 2.5% and 3% by the end of 2013, Cannon told reporters.

As a result, mortgage originations will fall 7.7% from 2011 to $1.1 trillion in 2012 and drop to $1 trillion in 2013.

"Our mortgage origination forecast reflects weak demand due to the lack of home buyer incentives, refinance burnout, and continued weak home prices that should prevent a sharp increase in purchase activity," Cannon said.

Brian Gardner, a senior vice president at KBW, said he expects to see a "series of settlements" between the servicers and state attorneys general early next year that includes modest principal writedowns and a framework for national servicing standards.

He cautioned, however, that the "exact timing of the settlements is impossible to forecast."

Meanwhile, the protracted settlement talks continue to be a "drag" on the housing market along with an excess supply of homes and a large inventory of delinquent loans that eventually will reach foreclosure and depress values, Cannon said.

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Corrected December 13, 2011 at 1:49PM: A previous version of this story understated a projection for mortgage originations for 2012. It is $1.1 trillion, not $1.1 billion.