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FBR: Make credit available or we won’t see $1 trillion in originations

Weak May and June continue to drag market down

Over the last few months, the housing indicators haven’t exactly been chock full of positivity. There was hope in the industry that the spring buying season would rescue the market from a tough winter, but that doesn’t appear to be happening.

Pending home sales are down from 2013’s levels and mortgage applications continued to drop last week, down 16% from the same week in 2013. Fannie Mae’s June National Housing Survey suggests that the economy may not reach “normal” levels before the end of 2016.

And perhaps most troubling, mortgage originations may struggle to reach $1 trillion, according to analysts from FBR Capital Markets. Nothing happens in this industry without mortgage originations. They’re the lifeblood of this industry. Without originations, there are no servicing rights available for purchase and there are no securitizations to invest in.

"With a weak May and only a modest improvement in June, as well as a run-rate around $1 trillion of total originations in what is historically the strongest quarter for the industry in any given year, we believe the market continues to face a risk of going sub $1 trillion in originations,” FBR analysts said.

Street projections for 2014’s origination total were somewhere in the neighborhood of $1.1 to $1.2 trillion, but now FBR is forecasting that originations will only reach $989 billion in 2014.

“We think the next couple quarters could be challenging for mortgage companies,” FBR analysts Paul Miller, Thomas LeTrent and Jessica Levi-Ribner said in an industry update. “In order for the purchase market to experience a true recovery and outpace the decline in refinancings, we believe that banks will need to go down the credit spectrum and lend to lower-FICO borrowers.”

Making credit more readily available has been the focus of several federal policy initiatives in the last few months. First, Federal Housing Finance Agency Director Mel Watt named maintaining credit availability as one of his main goals for the FHFA and the enterprises it oversees, Fannie Mae and Freddie Mac, in his first public address.

Then the Federal Housing Administration offered up its own plan to expand credit access. In its “Blueprint for Access,” the FHA outlined additional steps the agency would be taking to bring credit to “underserved” borrowers.

And two weeks ago, U.S. Treasury Secretary Jacob Lew announced several initiatives designed to stimulate the slumbering market. One of the specific plans Lew highlighted was a push to expand access to credit by working to revive the private-label mortgage-backed securities market.

He described the private-label securities market as “dormant” since the financial crisis. Lew also said that the Treasury will be publishing a “request for comment,” in an effort to “help us better understand what we can do to encourage a well-functioning private securitization market.”

Lew said the administration also plans to host a series of upcoming meetings with investors and securitizers to further explore ways to increase private lending.

FBR’s analysts believe that these moves show that the government is focused on “alleviating current existing credit restrictions through policy over time,” but that true recovery won’t happen unless banks lower their lending standards and allow lower-income borrowers back into the market. 

And despite a report on Tuesday that mortgage credit availability increased slightly in June, the indicators still aren't positive. Chris Flanagan, MBS/ABS strategist for BofA Merrill Lynch, echoed FBR's sentiments and said mortgage activity is going to underperform in 2014. Flanagan believes originations may not even sniff the $989 billion that FBR is forecasting.

“We were expecting $1 trillion in gross issuance for the year (at the start of 2014.) We’re at about $200 billion now,” Flanagan said. “So we’re on track for $750 billion for the year, which is less than expected.”

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