Government-sponsored enterprise (GSE) Fannie Mae (FNM) cut its projection for 2010 mortgage originations for the second month after new and existing home sales dipped sharply in January. Fannie said in the March outlook report (download here) that the housing setback, although temporary, underscores the fragile recovery seen so far in the economy. The housing market should rebound later in the year, the outlook states, but at a lower rate than previously projected. Doug Duncan and Orawin Velz of Fannie's economics and mortgage market analysis group reduced their projection for purchase-only mortgage volume "somewhat" to $716bn on lower projected home sales. They estimate total mortgage originations for 2010 to come in at $1.31trn, down from $1.97trn in 2009, with a refinance share of 44%. The overall origination projection was slashed again from $1.34trn in February's outlook report, which also lowered the projection from $1.35trn in January. The March projection is now below the $1.32trn level estimated in December 2009. "Unfortunately, despite the high hopes associated with the extended and expanded homebuyer tax credit, housing activity appears to have faced a setback that went beyond the impact of adverse weather conditions," Duncan and Velz wrote in the March report. "Continued recovery in housing is the key to a durable economic recovery, and a renewed decline in activity adds downside risks to that outlook." Both new and existing home sales dropped "sharply" in January, they said. New home sales fell in the third straight month to a new record low, surpassing the previous record set last year. These declines pushed up the months' supply of new homes to its highest level since May 2009. Existing home sales experienced the second consecutive sharp drop but stayed 12% above the record low. "While we had expected sales to pull back from an unsustainable pace in the fourth quarter, as homebuyers rushed to buy homes before the tax credit was tentatively set to expire, the drop in the current quarter will likely turn out to be larger than we had anticipated," Duncan and Velz said. Write to Diana Golobay. Disclosure: the author holds no relevant investment positions.