The Federal Reserve's planned reduction in bond purchases will drive rates up 50 basis points over the course of 2014 as mortgage-backed securities spreads widen, agency forecasts say.

The expected drop in refinancing in 2014 would force originators to rely primarily on purchase lending for the first time in more than a decade.

The last time purchase money mortgages constituted more than half of the primary market was in 2000, according to Frank Nothaft, vice president and chief economist at Freddie Mac.

The purchase-refi origination mix is expected to shift from roughly 60% purchases and 40% refis on average in 2013 to 40%-60% on average next year, according to Freddie's forecast. Refis started this year above 70% in the first quarter and they are probably closer to 50% of the market now, says Nothaft.

It has been a long time since the market has been purchase dominated, but unlike in 2013, when rising rates largely caught the market off guard, the shift in the market's mix next year is expected.

The market had priced in the Fed's 2014 tapering plan before it became formal, says Orawin Velz, Fannie Mae's director of economics. The timing came earlier than some expected, but the tapering also turned out to be more gradual than some forecast.

Fannie estimates a projected decline to around $1.3 trillion in 2014 from $1.8 trillion, Freddie estimates a decline to around $1.1 trillion from $1.5 trillion and the Mortgage Bankers Association had forecast a 32% drop, to $1.2 trillion, even before the taper plan was announced. Freddie's 2012 to 2013 estimated decline is just 10%.

"The drop in refis offsets any gain in purchase money" in the 2014 forecast, Nothaft says.

Purchases will likely pick up next year but the home price gains could be slower. They will be half of what they were percentage-wise this year at around 6%, according to Freddie's outlook report.

Though mortgage volume overall will almost certainly drop next year, some say predictions of a precipitous fall are overblown.

Refi projections are largely estimate-based until Home Mortgage Disclosure Act data are released, so they are subject to change, Velz notes.

The other uncertainty lies in the pace of the economic recovery; the Fed will only follow through with its plan to ease up on bond purchases if the economy shows sufficient strength.

The beginning of the Fed's taper will be tough on lenders, given the wave of new regulations they also will be starting to contend with in January. The confluence of events makes could trigger more industry consolidation, says Steve Calk, the chairman and chief executive at the Federal Savings Bank in Overland Park, Kan.

"Those of us who have focused primarily on the purchase business are surviving and dare I say thriving, but I've seen a number of companies that are really suffering," says Calk, who plans to selectively acquire mortgage companies in the coming year.

This story first appeared in National Mortgage News.

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