Total mortgage production is predicted to drop 16 percent in 2008 to $1.96 trillion, according to a forecast by the Mortgage Bankers Association -- if it happens, it will be the first time since 2000 that total production has fallen below $2 trillion. Residential purchase mortgage originations are predicted to decline further, falling an expected 18 percent in 2008 to $955 billion from a projected $1.16 trillion in 2007, the MBA said. "The principal concern of the current credit crisis lies in the possibility that banks will eventually run out of capital," said MBA chief economist Doug Duncan. "Banks are running up against capital limits as they write down the value of assets at the same time they are putting loans on their balance sheets because the markets for securitized products are essentially closed." Duncan's at least partly right; the flip side of securitization's big freeze, however, goes further than just putting assets on the balance sheet. It's also exposing so-called "hidden leverage" on a bank's balance sheet at the precise time more traditional debt financing is needed. I don't know that many have really grasped how the securitization machine both enables greater leverage while simultaneously reducing capital requirements -- although I'm certain that every CFO at every financial institution, mortgage insurer and bond insurer is painfully aware of this fact right about now. (I'll expound more on this in a coming post, still in draft form, that looks at the future of securitization in a changed mortgage industry.) As for the housing market, the MBA said that it expects housing starts and home sales to continue to trend down and reach bottom around the end of the 3rd quarter 2008. Total existing home sales for 2008 are predicted to decline by about 13 percent from 2007 to 4.94 million units, while new home sales will decline by about 15 percent in 2008 from 2007 to 666,000 units, the MBA said. The trade association also said that it expects the national median home price to decline by roughly two percent this year, then increasing by roughly that same amount in 2009. The MBA also said it expects origination volume to continue to fall in 2009, as well, falling another 4 percent from 2008's projected level to $1.88 trillion. For more information, visit