In a media interview yesterday, MBA chief economist Doug Duncan said he believes that “hundreds” of lending operations could fail during the next two years as the industry works out excess loan capacity built up during the recent housing boom. Nonetheless, the trade group offered a steady-but-unspectacular view for the coming year, predicting 1.33 trillion in purchase loan originations during 2007 and total production of $2.39 trillion. “Residential investment is expected to decline further through the first half of 2007 but at a diminishing pace. Economic growth should accelerate later this year to a trend-like pace as the drag from the housing sector wanes,” said Duncan. “Long-term interest rates have remained historically low following two years of monetary tightening. Consumer spending growth is robust, helped by solid stock market gains, declining oil prices and healthy wage increases. The trade sector has also begun to turn around, contributing to economic growth.â€?

Numerous subprime and home equity lenders have run into problems as of late, with Horsham, PA-based Mortgage Lenders Network USA among the largest to shut down warehouse operations in the face of a deteriorating mortgage credit environment, as reported here on Housing Wire. Duncan said he expects that the Fed will keep the fed funds rate steady at the current 5.25 percent through the forecast period, as economic growth firms up to a trend pace. Incoming data suggesting that economic activity is gradually improving over the past month has caused the financial market to pare down expectations of an easing in the first half of this year, resulting in an increase in long-term rates, he said. The rates on fixed-rate mortgages are currently about 6.2 percent. Duncan said he expects long-term rates to rise modestly this year, helping to cushion the decline in residential housing activity that will continue through at least mid-2007. Commercial real estate activity should remain a bright spot in the economy. “The 30-year fixed-rate mortgage yield should trend modestly higher over the first half of the year, reaching 6.5 percent by the third quarter and edging up just slightly through 2009. Thus, interest rates will still be quite low by historical standards,â€? said Duncan. Other highlights of the MBA’s 2007 forecast include:

• Total existing-home sales for 2007 are predicted to decline by about 7 percent relative to 2006, while new-home sales are forecast to decline by about 8 percent from 2006.
• Existing home price appreciation is expected to slow significantly over the next three years. According to the MBA, median prices should remain relatively flat for both new and existing homes, and price gains for in 2008 and 2009 are expected to limited to about 2 percent.

“There are some downside risks in forecast,â€? said Duncan. “The housing sector could deteriorate more than projected, with sharper declines in single-family housing starts and home sales, resulting in sustained declining year-over-year home prices. This could lead to a marked slowdown in consumer spending growth and threaten an economic expansion. “If so, the Fed could start easing to prevent a recession. However, if core inflation remains elevated or even edges higher, the Fed would likely remain on the sideline, increasing recession risks. We believe the probability for this scenario to be small.â€?