The residential finance market is fundamentally sound and working efficiently, according to a study released today by The Mortgage Bankers Association. The study examines the housing and mortgage markets, while specifically focusing on the increasingly globalized market for mortgage debt, decelerating housing markets, new mortgage originations, outstanding mortgage debt, nontraditional mortgage products, trends in mortgage delinquencies and foreclosures, and the overall economy. While not specifially mentioned by the trade organization, the study’s release comes on the heels of a much-publicized report by the Center for Responsible Lending, which in December alleged that 2.2 million American households could lose their homes, costing lenders as much as $164 billion due to foreclosures in the subprime mortgage market. “[The MBA] study provides relevant context and perspective on the current state of the economy and its implications for the housing and mortgage markets,” said Doug Duncan, chief economist and senior vice president at the MBA. “In order to understand the developments with respect to trends in mortgage product choice and mortgage delinquency and foreclosure rates, one needs to understand the underlying economic trends.

“The housing and mortgage markets respond to and reflect underlying economic strength or weakness. In light of the ongoing discussions surrounding suitability and other potential legislative and regulatory actions, policymakers need to consider the full economic context rather than examine any particular issue in isolation.” Key findings of the MBA-sponsored study include:

• The U.S. economy will continue to grow in 2007, but at a slightly below trend rate of growth.
• The housing market will regain its footing by mid-to-late 2007, depending on what measure is used. Home sales and starts will likely begin to increase in mid-2007, but, given the large inventory overhang, prices are unlikely to show any significant increase until late 2007 or early 2008.
• The residential finance market is fundamentally sound and working efficiently. The housing market will continue to benefit from relatively low long-term interest rates. For ARM borrowers, we expect short-term interest rates to be steady going forward.
• Mortgage originations will fall in 2007 relative to 2006 as a result of a decline in home sales and diminished refinance activity.

The MBA said that delinquency rates are evolving, and not of major concern to the industry as a whole. Barring any unexpected downturn in the economy, the recent increase in mortgage delinquency rates will likely peak by the end of 2007, the MBA said, but at levels well below those of past peaks. This lower peak will come despite the change in the composition of outstanding loans, namely a larger proportion of subprime loans in recent years, the MBA asserted. The MBA forecast for delinquencies stands in stark contrast to a report released last week by research firm Friedman Billings Ramsey Group Inc., which found that defaults on subprime mortgages in November 2006 rose above their worst levels during the last recession six years ago. Link: The full report is available here.