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FBR: Mortgage market booms, will push $2 trillion in 2016

Cites continued low rates and stable regulatory environment

Count the analysts of FBR & Co. among those thinking that 2016 is going to end up being one of the strongest years for mortgage lending in recent memory.

In a new report, FBR analysts Paul Miller and Tim Hayes tout a mortgage market that is “continuing to shine” throughout this year, thanks in large part to the continually low mortgage interest rates that are now the norm and the “most stable regulatory environment in years.”

To that end, Miller and Hayes write that FBR is increasing its forecast for 2016 total mortgage industry originations from $1.65 trillion to $1.9 trillion due to the “continued strength in the purchase mortgage market and a healthy boost to refinances in light of the low interest rate environment throughout the year.”

For reference, last year there was $1.74 trillion in originations, while 2014 saw only $1.26 trillion in originations, according to FBR’s report.

As FBR notes, mortgage originations are trending up and should level off at a new, healthy, sustainable level.

“For some time now, we have articulated our belief that the normalized origination market in the U.S. shakes out at around $1.7 trillion with the purchase market representing somewhere in the range of $900 billion to $1 trillion and the refinance market accounting for the delta,” Miller and Hayes write. “With that in mind, we think that the tailwinds from lower interest rates will boost production through that level in FY16, hence our $1.9 trillion estimate.”

Additionally, Miller and Hayes establish FBR’s 2017 estimate for mortgage originations at $1.75 trillion, based on “continued positive momentum in the purchase market but a decline in refi volumes from 2016.”

Supporting Miller and Hayes’ prediction is the fact that the trailing four-quarter purchase average jumped to $236 billion, which is the highest level since the first quarter of 2008. The second quarter of 2016 also marked the 10th straight quarter of positive sequential growth.

“Over the last year, average purchase originations have totaled $236 billion on a quarterly basis, which compares to $210 billion merely a year ago and post-crisis lows of $121 billion,” Miller and Hayes write.

“These results continue to support our thesis that the ‘new normal’ of $1.5 trillion in sustainable originations is already here,” the FBR analysts continue. “Ultimately, the improvement in the U.S. housing market has been gradual, but we believe purchase volumes will continue to grow and approach $1 trillion in 2017, which is more in line with what we believe to be a ‘normalized’ level.”

Another reason for the sustained strength of the mortgage market is what Miller and Hayes call the “most stable regulatory environment in years.”

According to the FBR analysts, regulatory risk has “consistently figured into the downside risk” to the company’s mortgage estimates over the last few years, especially as the industry adjusted to the definition of what makes a “Qualified Mortgage,” prepared for and implemented the Consumer Financial Protection Bureau’s new mortgage disclosure rules, or adjusted credit boxes to avoid representation and warranty risk or specialty servicing risks.

But now, with those rules in effect, the market has the chance to establish a solid base in the new regulatory environment.

“These new rules and regulations certainly continue to factor into the overall size of the origination market, but they are no longer the headwind they once were as the industry has transitioned to the ‘new’ regulatory reality,” Miller and Hayes write.

“We fully continue to expect some growing pains as regulators continue their supervisory and enforcement activities over the mortgage market,” they continue. “However, the lack of any large-scale new regulatory requirement in the mortgage market provides for the most stable regulatory environment in recent memory, which reinforces the confidence we have in our estimates.”

Miller and Hayes also note the relatively depressed purchase origination market share leaves room for growth and stability.

“Additionally, purchase market originations have accounted for approximately 13% of total mortgage debt outstanding over the past 25 years but now stand closer to 9%,” the FBR analysts note.

“While we do not expect purchase market originations to trend in line with the historical average per se, we do think that the gap will narrow and that originations will likely hone in on the 10% level in 2017, providing a ‘stickier’ base for the mortgage market in following years relative to a more volatile refi-heavy market,” they conclude.

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