Fewer 2014 Mortgages -- Good News for Borrowers

Mortgage activity is excepted to drop in 2014, an odd by-product of record-low rates the previous year. For borrowers, the news is a good sign, because it means lenders will have to fight harder for your business.

To understand what's going on, go back to the good old days; that would be 2012 in this case. Mortgage rates averaged 3.66 percent in 2012, the lowest rate seen in 65 years. Mortgages during the first half of 2013 were also below four percent, and then drifted higher.

Trends and Mortgages

The historically-low mortgages seen in 2012 and 2013 set off several reactions.

First, rising home values meant that many owners who could not refinance since the mortgage meltdown of 2006 and 2007 finally had an opportunity to get new loans and reduce monthly costs. The result was a huge amount of refinancing activity.

Second, while home values have increased, they remain relative bargains in most markets -- a good incentive to buy, especially as short-sales and foreclosures continue to be available at discount. As evidence, the government reports that home values for October 2013 increased for the 21st month in a row -- and yet they were still 8.8 percent below the pricing levels seen in April 2007, the market peak.

Third, while home values have been rising, mortgage rates have been in a trough. In mid-January of 2014, mortgages are generally around the 4.5 percent level -- higher than the historic lows seen in 2012 and 2013, but vastly lower than the 8.6 percent average seen during the past 40 years, according to Standard & Poors.

Given this background the refinancing levels seen during the past few years could not possibly be maintained; therefore mortgage activity would have to fall at some point -- "some point" being 2014.

2014 Mortgage Predictions

1. Fewer Originations

In October, the Mortgage Bankers Association forecast that 2014 loan originations would fall 32 percent from 2013's level. The Association also said that mortgage rates were likely to reach five percent in 2014.

But now the MBA has revised its forecast. The new forecast says loan originations will actually fall to $1.12 trillion this year, down from $1.7 trillion in 2013.

“Despite an economic outlook of steady growth and a recovering job market, mortgage applications have been decreasing -- likely due to a combination of rising rates and regulatory implementation, specifically the new Qualified Mortgage Rule,” said Mike Fratantoni, Chief Economist for MBA. “As a result, we have lowered our expectations for both purchase and refinance originations in the first half of 2014."

Actually though, the Qualified Mortgage Rule has little if anything to do with lower origination levels. If it were true that the new regulations under Wall Street Reform are pushing down lender activity, surely such rules would impact all loans. In fact, that isn't the case. The MBA expects purchase money mortgage originations -- the loans used to buy homes -- to increase by 3.8 percent in 2014.

2. Refinancing Down

What's falling is refinancing. MBA expects refinancing activity in 2014 to drop by a whooping 60 percent. That result is logical and surely no surprise given the low rates and massive refinancing levels seen during the past two years. It's not new rules from Washington which are causing lower refinancing levels, it is instead the natural result of past refinancing and higher rates.

3. More Lenders Competing for Fewer Borrowers

For borrowers, the coming year looks like a very good time to finance and refinance. Rates will be well below historic norms and lenders will have to fight for your business. That's a good combination for anyone who wants a mortgage.

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