Mortgage slowdown predicted

Chicago Tribune

CHICAGO — After a year like none other in the mortgage business, some say things could be in for a slowdown.

Last week, the trade group for America's mortgage bankers predicted that rates would rise and loan activity would slow dramatically in 2003. The group expects rates on popular 30-year fixed-rate mortgages — which have hovered near 6 percent in recent weeks — to reach between 6.8 percent and 7 percent by the end of 2003.

The 30-year home loan has reached lows not seen since the 1960s as the Federal Reserve has lowered interest rates to boost a flagging economy and as yields on benchmark Treasury bonds have plummeted.

As the economy continues its erratic recovery, mortgage lending should ease to $1.57 trillion next year, a 35 percent drop from what is expected to be a record $2.42 trillion in 2002, the Mortgage Bankers Association of America said in its annual forecast released at the group's convention in Chicago.

Currently, about 70 percent of mortgage originations are refinancings and that heavy volume will spill over into the first half of 2003 before slowing, said Douglas Duncan, chief economist and senior vice president of the mortgage association. For the year, he predicts 30-year home loans will average 6.5 percent.

Even with a big drop, however, the 2003 forecast would still be the third-biggest volume of mortgage lending on record, after all-time highs in 2002 and in 2001, when the value of all mortgages written were just over $2 trillion.

Another reason for the expected slowdown in mortgage volume is that the simmering housing market — which is on pace for nearly 2 million new home starts this year — is likely to retract.

"It's hard to complain about housing, which has been strong for the last three to four years. The combination of 40-year-low interest rates and accumulated home value appreciation is generating the greatest (mortgage) origination volume in history," Duncan said.

"The declines we're forecasting are just backing off all-time high sales in new and resale homes this year."

While about 5.5 million existing homes are expected to be sold in 2002, the mortgage group forecasts a drop to 5.2 million next year.

What's unusual about the current economic climate, Duncan said, is that normally there is pent-up demand for housing when the nation comes out of a recession. But that has not been a factor now because housing has remained strong throughout the downturn — largely because of the record-low mortgage rates.