Meet the Author

Yuliya Demyanyk |

Senior Research Economist

Yuliya Demyanyk

Yuliya Demyanyk is a senior research economist in the Research Department of the Federal Reserve Bank of Cleveland. Her research focuses on analysis of the subprime mortgage market, on the roles that financial intermediation and banking regulation play in the U.S. economy, and on analysis of financial integration in the United States as well as in the European Union.

Read full bio

Meet the Author

Matthew Koepke |

Research Analyst

Matthew Koepke

Matthew Koepke is a former research analyst in the Research Department of the Federal Reserve Bank of Cleveland.

05.31.11

Economic Trends

Mortgage Originations Struggle to Stay Afloat

Yuliya Demyanyk and Matthew Koepke

While the rest of the economy is slowly recovering, the housing market still seems to be struggling. According to the latest edition of Inside Mortgage Finance, mortgage originations in the first quarter of 2011 fell 35.0 percent, to an estimated $325 billion, reversing three consecutive quarters of origination growth. The first quarter’s decline represents the largest drop in originations since the beginning of the financial crisis, when originations fell 31.5 percent. Moreover, the Mortgage Bankers Association projects that mortgage originations could fall to $1.05 trillion in 2011, the lowest level of total originations since 2000 (Economic and Mortgage Commentary, May 2011).

The first quarter’s dramatic decline in originations is likely driven by higher interest rates, which are reducing demand for mortgage refinances. If the mortgage origination market is to stay afloat, mortgage demand will have to be driven by new purchases. However, flat activity in housing starts and permits and modest improvements in new and existing home sales suggest that it is unlikely that there will be enough new purchases to offset the decline in mortgage refinances. Higher mortgage interest rates and low consumer demand will likely push mortgage originations to decade lows.

Due to the financial crisis, the mortgage market has been supported by record-low mortgage rates. From September 2008 to the present, the contract interest rates on new and existing housing averaged 5.04 percent and 5.13 percent, roughly 179 and 176 basis points below their averages since 1990. The low rates resulted in a surge in refinance activity. From September 2008 to December 2010, mortgage refinance originations increased from $111 billion to $392 billion, while the share of mortgage refinances, as a percent of total originations, increased dramatically from 36.4 percent to 78.4 percent.

However, recent upward movements in interest rates have caused demand for mortgage originations to decline. Since December 2010, the contract interest rate on new single-family homes has risen 50 basis points, while mortgage refinances have plummeted 40.1 percent to $235 billion. While the share of mortgage refinances in total originations is still relatively high at 72.3 percent, the Mortgage Bankers Association expects mortgage rates to increase further to 5.5 percent by the end of 2011. With the expected increase in mortgages rates, the Association expects the mortgage refinance share of total mortgage originations to decline from 70 percent to 54 percent.

If mortgage rates rise and demand for mortgage refinances falls as predicted, the demand for mortgage originations will be more dependent on new purchases. The latest housing start and permit data as well as new and existing home sales suggest that it is unlikely that there will be enough new purchases to offset the decline in mortgage refinances. Housing starts of single-family homes stood at 394,000 in April, slightly above the all-time low of 353,000 recorded in March 2009. While there has been some improvement in sales of new and existing single-family homes, neither trend suggests significant purchasing activity going forward. Since 2006, new and residential single-family homes sales are down 43.4 percent and 76.3 percent from their respective highs.

Given the prospect of higher mortgage rates, stagnant growth in housing starts and permits, and low levels of new and existing housing sales, purchase originations are unlikely to grow sufficiently to offset the decline in refinance originations. Consequently, mortgage production is likely to continue to struggle as the economy recovers.