Expect the mortgage lending spigot to ooze fewer loans in 2014, an industry trade group said Tuesday.

Rising interest rates and heightened regulations may take a bigger bite out of originations than initially forecasted, according to a new report from the Mortgage Bankers Association.

The MBA lowered its forecast for 2014 mortgage originations by $57 billion to $1.12 trillion.

More specifically, the group lowered first-half expectations for both purchase and refinance loans.

Purchase originations are expected to reach a revised $677 billion for 2014, compared to the $711-billion figure previously forecasted. Compared to 2013, purchase originations are expected to increase by 3.8%. 

"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. 

But a giant portion of the drop comes from a decline in refinance originations, which are now expected to reach a more modest $440 billion in 2014, compared to earlier estimates of $463 billion. The revised amount is around 60% lower than 2013 refinance originations.

Fratantoni explained the MBA even calculated for the off chance that rates would increase or decrease one percentage point, and even with a lower rate, it still does not predict a big bounce back in refinance demand.

"In terms of regulation, it will take time for lenders and borrowers to become accustom to the new contrast on lending. By the middle of the year, the pace of business will pick up again as lenders get accustomed to rules," Fratantoni explained. 

"Refinancing will not recover as long as interest rates do not go down, therefore the declines that we see will continue. But obviously at some point they will level out and no longer will be a factor," said Dick Bove, an analyst with Rafferty Capial Markets.

However, housing demand is increasing and eventually will make up for the dip in refinancing, he said. Bove predicted that by the second half of 2013 refinance volume will not be an issue and will be replaced by housing demand.

"I do not think the industry was down as much as people believe; I think it is by design," said Paul Miller, managing director of FBR Capital Markets.

"I think you will see better origination numbers the smaller the institution. But it is not as bad as the JPMorgan and Wells Fargo numbers," he explained. 

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