Mortgage Originations—A Mixed Bag
The mortgage market ended 2010 on a high note, with mortgage originations increasing for the third consecutive quarter and reversing a trend of three consecutive quarterly declines. According to the January 28 issue of Inside Mortgage Finance, fourth-quarter mortgage originations rose 22.0 percent to $500 billion, representing the highest level of originations since the second quarter of 2009. Additionally, the increase represents the first consecutive double-digit quarterly percentage increase since the second quarter of 2009.
Despite the improvement in mortgage originations, the number of total mortgages serviced continued to fall. According the February 4 issue of Inside Mortgage Finance, total mortgages serviced by the top mortgage servicers declined 2.0 percent in 2010, falling from $10.7 trillion in the first quarter to $10.5 trillion in the fourth quarter. While mortgage originations were up, the majority of the new originations were for mortgage refinances, where existing loans are converted into new loans at different rates or maturities, and not for new home purchases. Consequently, few new loans have been added to mortgage servicers’ portfolios. Additionally, the level of foreclosed homes has risen dramatically, which reduces the total number of mortgages serviced. The combination of the high level of refinancing activity and the increase in home foreclosures is likely causing total mortgages serviced to decline despite the increase in mortgage originations.
Refinancings have constituted the majority of mortgage originations since December 2008. Driven by the low-interest-rate environment, refinancings have averaged 68 percent of all originations since March 2009, and by the fourth quarter of 2010 they had grown to 78 percent of all mortgages originated. Such high proportions of refinancing mean that banks are not creating many new loans.
Foreclosures are playing a big role in reducing the number of mortgages serviced because they have risen to such high levels. From 2000-2007, the average number of foreclosed homes was 1.26 million, but since 2008, that number has ballooned to 3.91 million. Given that foreclosures and delinquencies remain at an all-time high, it is unlikely that the number of mortgages serviced will rise without an increase in purchase originations.
Mortgage originations may have improved in 2010, but the improvement has done little to raise the number of mortgages serviced. Though activity has picked up, high levels of refinancing originations and foreclosures have made it difficult for the increased activity to fully offset the declines in servicers’ existing portfolios. Looking ahead, total mortgages serviced will continue to decline if low demand for purchase originations persists or if home foreclosures rise.