Commentary: 2020-2021 Mortgage Origination Forecast Update

What an extraordinary year!  Since it began its lethal acceleration in March, the COVID-19 pandemic has brought unprecedented disruption to this country and to the rest of the world.  Few events in history have created such rapid, widespread, and massive shocks economically, politically, and socially.       

Added to this, we have also experienced a flare-up of protest over police policy and systemic racial inequality, though thankfully, that seems to be winding down.  And looming in the background is the pressure of an enormously contentious approaching national election.  The second half of 2020 promises to be even more volatile than the electrifying first half.

Economically, the country has been staggered by work stoppages and layoffs; however, business is booming within some industry sectors.  Many tech companies are performing remarkably well, and mortgage lenders are having their biggest and most profitable year since 2003.

Major factors include:

• GDP: Fell by -32.9% in Q2 – not as bad as some had estimated – but still the largest decline ever recorded.

• Employment conditions: After peaking at 14.7% in April, the unemployment rate has fallen for the last two months; however, with the recent rise in COVID-19 numbers, initial claims for unemployment insurance have started to ratchet up again as more businesses have been forced to re-close.
• Interest rates: Short-term rates are now near zero, and the Fed will keep them there indefinitely.Long-term rates, including fixed mortgage rates, are at all-time lows.
• Equities Market:The S&P 500 index has nearly recovered to its pre-coronavirus peak, while the tech-heavy NASDAQ index has already surpassed its previous peak by more than 10%.
• Housing market: Purchase demand plummeted in the early weeks of the pandemic but bounced back better than we had expected.With housing inventories still very lean, home prices are still rising, but the rate of increase has slowed.

With the instant worldwide recession created by the pandemic, Treasury bond yields fell to record lows, dragging mortgage rates down with them.  That triggered an enormous refi boom which lenders have handled well, despite many loan processers working from home.  The low mortgage rates have also made home purchases more affordable than they’ve been for years, triggering a quicker-than-expected recovery in purchase demand – although 2020 purchase demand is still lower than last year, particularly for low-income borrowers.  For households not financially affected by layoffs, work slowdowns, or hampered by tightened credit conditions, it’s a great time to buy a house… if they can find one. 

For 2020, we estimate that refinance originations will more than double from 2019 to $2.1 trillion, while purchase originations will fall about -20% to $953 billion.  The resulting $3.05 trillion total will be the biggest year of originations since 2003, which was the biggest year ever.

For 2021, we expect refinances to fall off about -43 percent to $1.2 trillion, while purchase originations will grow about 5.3% to $1.0 trillion.

A major concern exists over the resolution of mortgage payment forbearance.  About 4 million mortgages are in forbearance programs now.  Whether they get resolved or start down the path to foreclosure will have a significant effect on the health of the housing market next year.