Market May Be Primed for Origination Spike

Mortgage rates plummeted following the Fed’s decision not to raise the federal funds target rate on September 21 and consumer confidence is at its highest level since the crisis—yet this has not translated to a higher number of mortgage loan applications.

Freddie Mac’s latest Primary Mortgage Market Survey for the week ending September 29, 2016, reported that the average 30-year fixed-rate mortgage (FRM) fell by six basis points down to 3.42 percent, a mere 11 basis points higher than the all-time low of 3.31 percent set nearly four years ago. The average 15-year FRM declined by four basis points down to 2.72 percent for the week.

Earlier this week, the Conference Board reported that its monthly Consumer Confidence Index rose by from 101.8 up to 104.1 (a post-recession high) from August to September. The Board’s Present Situation Index jumped from 125.3 to 128.5 during the same period.

“The course of the economy is uncertain, yet consumers continue to be a bright spot,” Freddie Mac Chief Economist Sean Becketti said. “The September consumer confidence index is up 3 percent to 104.1, exceeding forecasts and reaching a new cycle high.”

While on the surface it seems like the combination of near-historic low mortgage rates and a post-recession high for consumer confidence would be a boon for mortgage originations, the number of mortgage loan applications has been on the decline. The Mortgage Bankers Association reported a decline of 0.7 percent in its latest Market Composite Index (which measures loan application volume) for the week ending September 23. Not only that, but the refinance share or mortgage activity also declined during that same period, from 63.1 percent down to 62.7 percent of total applications.

With market conditions seemingly primed for a surge in origination activity, why has such a surge not taken place yet? Or is it about to?

According to Freddie Mac, that surge is taking place right now. The GSE’s September 2016 Outlook released earlier this month forecasted a surge in originations during the third quarter, which ends on September 30. For the full year of 2016, Freddie Mac is predicting origination volume of $2 trillion, the highest level in four years.

“All indications are that mortgage originations will surge in the third quarter of 2016,” Becketti said, noting that refi activity was up by 36 percent over-the-year despite the weekly decline reported by the MBA. “Even if home purchase originations are flat year-over-year, total originations will rise due to strong refinance activity. Application data from the Mortgage Bankers Association indicates that refinance applications are up about 24 percent from the second quarter 2016 and nearly 60 percent year-over-year in the third quarter. Our forecast calls for a $60 billion, or 11 percent, increase in third quarter originations relative to the second quarter, and for total originations to reach $2 trillion in 2016.”