The Mortgage Bankers Association just released their latest forecasts for the remainder of 2011 and 2012 and there is both good news and bad news. Good news is that the MBA has raised their forecast for refinance activity lending volumes for the remainder of 2011. Bad news is that total lending in 2011 is forecast to decline from $1,572 billion in 2010 to $1,109 billion in 2011 and decline to $931 billion in 2012 (the lowest level since 1997).
And there is really nothing on the horizon today portending any significant gains in lending volumes or sales of existing homes and new homes.
The table below also includes what I term Effective Lending which is the sum of purchase lending plus 60 percent of refinance activity. Given the reissue credits in title insurance for refinance loans and that typically a refinance transaction does not include an owner’s title policy, Effective Lending gives a better look at probable title premiums and revenues – hence a more apples-to-apples comparison. Essentially, an increase of $100 billion of purchase lending equates to a greater level of title revenues than a $100 billion in refinance lending.
Good news is that purchase lending is forecast to increase in each and every quarter in 2012 when compared to 2011. This is based on a very slight increase in home sales and the stimulating effect on refinance lending volumes arising from all-time record low interest rates we are seeing today. The following table below shows the MBA forecast for both new and existing home sales. Note, however, that normal existing home sales are in the 5.5 to 6 million homes per year and new home sales normal is 800,000 to 1 million, so the anticipated level of lending volume for the next year and half is pretty grim.
While purchase lending is forecast to increase by more than 28 percent from 2011 to 2012, refinance lending – even with the all-time record low rates – is expected to decline more than 42 percent. Total 1 to 4 lending in 2011 is expected to be down 29.5 percent and then off another 16.1 percent in 2012. Effective lending is forecast to decline 26.7 percent and 7.2 percent for 2011 and 2012, respectively.
Refinance percentages as shown above are heading down for several reasons. First, rates are at an all-time low and likely cannot decline further (but I have said this for two years now and have been obviously incorrect). Second, new lender underwriting standards now exclude homeowners that just a few years ago could qualify for a refinance that no longer can do so. And finally, fully 23 percent of U.S. homeowners are underwater on their mortgages and thus cannot refinance. [We should allow every homeowner that is current on their loan today to refinance at current rates (no cash out) and that would, without increasing the Federal debt, get us out of this recession within 24 months. To be discussed more in detail in future writings.]
There are several caveats for these forecasts from the MBA. In the past, total residential lending forecasts by Fannie Mae, Freddie Mac and the MBA have changed by more than $1 trillion within a 12 month period. And obviously, these expectations are based on a dismal go-forward economy that can improve significantly or decline dramatically in less than a year. Nor is the MBA in consensus with other forecasters. Freddie Mac, for example, has an estimated $1.2 trillion total lending volume for 2011 (versus the MBA’s $1.1 trillion) and in 2012 Freddie expects $850 million of total lending volume (versus MBA’s $931 billion). Fannie Mae’s forecast for 2011 is $1.1 trillion in total lending and drops to $935 billion in 2012.
The bottom line is that expectations for residential lending are for a shrinking market in 2012. That said, expense controls by those in the real estate transaction industries become even more crucial as does productivity.
Batten down the hatches, the storm is not over.