Volume of Mortgage Originations Growing

Nearly all key real estate organizations are now revising their projected volume of mortgage loan originations this year. It appears the mortgage business will be significantly more active in coming months than forecast at the beginning of the year.

For example, Fannie Mae, the nation’s largest buyer of existing home mortgages (a government-sponsored enterprise), recently pushed their predicted volume of loan originations this year to $2.4 trillion. That would make it the third most active year ever. Fannie Mae also predicts long-term (mortgage) interest rates will move up only modestly this year, while Fed policy is on hold for a while and inflation is low.

The Mortgage Bankers Association is even more bullish in their mortgage activity projections for this year. They now predict loan originations will total $2.5 trillion up from $2.0 trillion. They explain their upward revised projection is primarily due to a continued low interest rate environment, stimulating both home purchase financing and the refinancing of existing mortgages.

Despite the strong pace of the economic recovery, interest rates have remained low for a variety of reason, said Doug Duncan, MBA’s chief economist. Some borrowers are responding to these rates by purchasing homes and others are making up for missed opportunities to refinance last year. MBA now expects mortgages for purchasing homes will make up 54 percent of total originations, or $1.4 trillion. Refinancings, which have been boosted by falling interest rates, will generate $1.1 trillion in originations. These numbers are up from $1.1 trillion and $0.7 trillion, respectively, in previous forecasts by MBA.

Duncan noted the rebound in the economy has been strong. Interest rates have remained low for several reasons. 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, the recovery in jobs has not been strong enough to drive up rates.

The National Association of Realtors, another major real estate group, agrees that the slow job market recovery is a key factor. Job gains have been modest over time but the rate of growth is relatively weak. The Bureau of Labor Statistics Household Survey showed there were 1.3 million jobs produced last year, said David Lereah, NAR’s chief economist.

That’s a wider measure of jobs than a separate survey of companies because it includes the self-employed, but we still have a way to go to recover all the jobs lost early in this decade. The silver lining now is that interest rates probably won’t move much until late in the year when the unemployment rate is expected to drop to 5.4 percent, he said.

Lereah predicts the 30-year fixed-rate mortgage will trend up very slowly this year, reaching 6.3 percent by the fourth quarter. Keeping interest rates close to historic lows will sustain very strong home sales, which should be only a few percentage points below last year’s record, he said.

At latest report, the Mortgage Bankers Association predicts the 30-year mortgage rate will average 5.6 percent this year. That would be the lowest average annual rate in more than four decades.

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New programs for minority and low-income homebuyers

Increasingly, we are a nation of homeowners. A record 68.6 percent of today’s households live in a home they own. And that proportion keeps rising. The federal government is pushing for aggressive new programs that will make it possible for even more families to afford and purchase a home. The American Dream Downpayment Act, signed into law in December, will provide about 40,000 families a year with financial assistance with home purchase down payments and closing costs. It’s set to begin this spring.

The most interesting aspect of new purchase and mortgage financing programs is its impact on minority and low-income families. For the first time ever, the majority of minority households own their home. That proportion is now up to 50.6 percent. The government’s initiative to dismantle barriers to homeownership also includes increasing the supply of affordable homes through the Single-Family Affordable Housing Tax Credit, increasing support for the Self-Help Homeownership Opportunities Program, and increasing home-buying education and counseling programs.

The federal budget for FY 2005 includes an allo’scation of $45 million for housing counseling to support agencies that counsel families regarding home-buying. That more than double the previous allocation. The 2005 budget also supports rural homeownership through the Department of Agriculture with $2.7 billion in home loan guarantees for low- to moderate-income rural residents. These mortgage loans are expected to provide 42,800 homeownership opportunities to rural families.

The administration has issued America’s Homeownership Challenge to the real estate and mortgage finance industries to encourage them to join the effort to close the gap that exists between the homeownership rates of minorities and non-minorities. The goal is to increase the number of minority homeowners by at least 5.5 million families before the end of this decade.

Real estate and mortgage companies now participating in the Challenge have already pledged to provide more than $1.1 trillion in mortgage purchases for minority homebuyers during this decade.

Financing a home is becoming a more viable possibility for more families all the time, with new programs being introduced to help those with marginal qualifications step over the line into the arena of qualified borrowers and home buyers, said Michael Levy, president-CEO of Home Savings Mortgage, an 18-office mortgage banking firm based in Oxnard, Calif.

An important function of today’s mortgage counselor is to educate borrowers about special programs that might help them meet their personal goals. The best method of obtaining the most advantageous mortgage is simply to apply for and lock-in an interest rate when prevailing rates are low. Those rates are now at almost record low levels, Levy noted.

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A push for more affordable housing

A new funding incentive to encourage state and local communities to remove excessive regulations that inhibit the production of affordable housing is being implemented by the Department of Housing and Urban Development (HUD).

On March 22, HUD notified potential applicants of its competitively awarded grant programs that it will begin awarding priority points to governmental and nongovernmental applicants in communities that have successfully demonstrated efforts to reduce regulatory barriers that prevent many working families from living in the community of their choice.

Common regulatory barriers include exclusionary zoning, antiquated building codes, duplicative reviews and approval processes, and excessive-unwarranted fees. These burdens can add tens of thousands of dollars to the cost of affordable housing, forcing hard-working lower income people such as teachers, firefighters, police officers, nurses and returning veterans to move out of their communities, it was stated in a HUD report.

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Hybrid ARMs Wave of the Future

Among the new and proposed actions by the Department of Housing and Urban Development (HUD) is to expand the offering of hybrid adjustable-rate mortgages (ARMs) in FHA mortgage options. This will allow homebuyers to choose mortgages with fixed-rates for periods of three, five, seven or ten years. It would then revert to an annually adjustable mortgage for the remainder of its term.

Under this rule, ARMs cannot change by more than one percent per year after the fixed-payment period is over, with a maximum change of five percent for the life of the loan. Other HUD steps being taken to enhance homeownership opportunities include the new Zero Downpayment Program for FHA-insured home mortgages. And a new initiative program would provide $200 million to help low-income families each year with downpayment and closing costs.

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Slow job market translates to low mortgage rates and home sales

Strange as it may seem, the lack of jobs throughout the country is stimulating strong home sales. On one hand, the sluggish job market recovery prevents many unemployed persons from acquiring a home they need. They can’t afford any home at this point. Some are even forced to sell their existing home and become renters until regaining steady employment.

But the minimal creation of new jobs keeps the lid on those low mortgage interest rates. Generally, the low mortgage rates have a stronger positive impact on home sales than the negative influence of jobless persons not being able to afford a home. Thus sales continue to be robust.

The Bureau of Labor Statistics Household Survey showed there were 1.3 million jobs produced last year, it was noted by David Lereah chief economist for the National Association of Realtors. That’s a wider measure of jobs than a separate survey of companies because it includes the self-employed, but we still have a way to go to recover all the jobs lost early in the decade, he said. The silver lining now is that interest rates probably won’t move much until late this year when the unemployment rate is expected to drop to 5.4 percent.

Lereah predicts the 30-year fixed-rate mortgage should trend up very slowly this year, reaching 6.3 percent in the fourth quarter. Keeping interest rates close to historic lows will sustain very strong homes sales. The volume of home sales should be only a few percentage points below last year’s record, he said.

Home sales are projected to reach 5.92 million units this year, second only to the 6.10 million sold last year. Newly constructed homes are projected at 1.04 million sales, while housing starts should total 1.78 million units this year. These are very respectable levels of home sales and construction. It will provide a solid foundation for our economic growth, Lereah said.

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Mortgage industry becoming more high-tech savvy

High-tech methods are growing rapidly in the mortgage industry. Technology-related budgets for mortgage lending firms last year increased by 24 percent over the previous year, and mortgage executives expect to increase it by an additional 47 percent this year, according to a survey taken by the Mortgage Bankers Association.

Among our top originators and servicers, we see a commitment to technology spending that has resulted from five key factors, said Doug Duncan, MBA’s chief economist. The first factor is industry consolidation. This has left companies in the position of needing to merge multiple systems into one for the sake of efficiency. Second, we see business realizing the need to eliminate manual processes that lead to errors and increased costs. Third, we see the continuous drive to integrate technology solutions from borrower to investor. Fourth is the new regulatory and compliance requirements with more detailed reporting. Fifth, we see an increased focus on customer retention initiatives in the face of increasing competition.

The bottom-line factor for the current flurry to enhance high-tech capabilities is probably the simple fact that more and more people are relying on the Internet as their primary source of information about home buying, selling and financing. Nearly three-quarters of all Americans (204.3 million people) now have access to the Internet from their homes, according to Nielsen/NetRatings.

In just a handful of years, online access has managed to gain the type of traction that took other media decades to achieve, said Kenneth Cassar with Nielsen/NetRatings.

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Another refi boom

Continuing low mortgage interest rates are sparking something of a revival in the refinance boom. Even with rates moving up and down a bit in recent weeks, the refinance market has been gaining momentum. Freddie Mac, one of the nation’s largest buyers of existing home mortgages, predicts that two-thirds of the loan volume in coming weeks will be refinance mortgages.

Jim Woodard writes a nationally syndicated newspaper column on real estate news and trends, carried in about 230 U.S. newspapers along with freelance features. Reproduction of this report, in part or entirety, is prohibited without the express permission of the author. E-mail: storyjim@aol.com. Web site: www.jimwoodard.net/.

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