Analysts Bullish on Originations Despite Interest Rate Spikes

While drastic changes in mortgage rates have some industry professionals fretting about the future, ""FBR Capital Markets"":http://www.fbr.com/ insists mortgage banks can still thrive in a higher rate environment.

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In a commentary released Tuesday, analysts at FBR pointed to market trends and recent events as evidence that origination volumes should remain elevated.

One major side effect of rising rates, FBR noted, is a decline in refinance volume--a reaction already observed in recent mortgage application surveys. However, citing remarks in a speech by Federal Reserve Governor Elizabeth Duke, the analysts note the end of the refinance boom should bring with it an opportunity for first-time homebuyers seeking purchase loans, a group that hasn't received as much attention as of late.

""[Duke] noted that if mortgage rates rose, refi volumes would decline, freeing capacity for purchase originations, especially those with lower FICO scores or higher LTV [loan-to-value ratio] loans. We agree and believe that in the absence of robust refi volumes, banks are likely to go down the credit spectrum with respect to borrowers in order to support purchase origination volumes,"" the researchers wrote.

At the same time, the Fed's recent decision to keep existing risk weightings on mortgages in its new capital rule ""frees up banks to originate and hold mortgages from across the FICO spectrum""--a move likely to benefit non-stress-test banks, which won't face penalization for lower-credit-quality loans.

Finally, FBR noted an estimated 20-25 percent of borrowers still have an economic incentive to refinance their mortgages, giving lenders a market to target in their efforts to sustain refinance volumes.

Given these and other factors, the firm forecasts $1.6 trillion in originations for 2013 and an added $1.4 trillion in 2014.

""We estimate that the market has already done $1 trillion of mortgage originations in the first half of the year and believe that it can easily reach our estimate with purchase activity making up 37 percent of total volume,"" the researchers wrote. ""So, while we factor in lower refi volumes, we include increased purchase originations, which should offset much of the decline.""