RealEstateEconomyWatch.com

The mortgage lending business is expected to take a turn for the worse in 2010 according to the industry’s leading trade group.

Mortgage origination volume is expected to plunge by almost 21 percent to $1.56 trillion next year compared to an estimated $1.96 trillion in originations in 2009 according to a new forecast released yesterday by the Mortgage Bankers Association.

According to the release, mortgage lenders can expect to experience a dramatic decline in refinancing business due to mortgage rates inching upwards throughout next year. The association’s Chief Economist, Jay Brinkman, predicts that refinancing volume will plummet by almost 40 percent to $803 billion in 2010 from $1.25 trillion in refinancing volume registered in 2009. Thirty-year mortgage rates are expected to average 5.4 percent next year compared to 5.1 percent in 2009.

On a more positive note, the association predicts that mortgage originations to purchase homes will rise by almost 12 percent next year to $803 billion compared to an estimated $718 billion in purchase originations this year. The increased purchase origination business is primarily due to an expected 12 percent increase in home sales to 6.06 million homes sold in 2010 compared to 5.41 million homes sold in 2009.

Purchase originations are expected to increase in importance for the mortgage lending business next year. The association predicts that purchase originations will register a 52 percent share of total originations next year, compared to only an estimated 37 percent share in 2009. The trade group also expects existing and new home prices to post modest gains next year, registering a 0.8 percent and 0.5 percent increases, respectively.

Predictions for the mortgage lending business have not always been reliable because so much of the business depends on the direction of interest rates. Historically, mortgage companies that heavily rely on the refinancing side of the business are subject to wider swings in earnings due to the volatility of interest rates. Given the projected decline in refinancing transactions next year, mortgage lenders that rely more on the purchase origination business will likely fare better in 2010.

Although mortgage lenders are expecting purchase originations and home sales to climb next year, there still remain serious risks to the housing recovery. The expiration of the $8,000 home purchase tax credit program at the end of November may stall future home sales. However, Congress is currently considering extending the tax credit program for another 6 months. Further, it is likely that foreclosure filings will continue to rise during next year due to planned rate resets on option ARM and interest only mortgage loans. More foreclosures are likely to keep home inventories from declining further, exerting downward pressure on home values, which in turn, could inhibit future home sales. And finally, if the economy continues to shed jobs next year, some households may not have the financial wherewithal to purchase homes. Even the Mortgage Bankers Association predicts that the unemployment rate will climb to 10.2 percent by the middle of 2010 compared to today’s 9.7 percent unemployment rate.