A disappointing performance in May has mortgage market commentators once again bringing down their origination forecasts for the year.
In a letter to clients, analysts at investment banking services firm FBR Capital Markets said they are lowering their 2014 origination outlook to $989 billion from an earlier forecast of nearly $1.1 trillion.
The company says the change reflects "a weaker May environment than previously forecast," pointing to securities issuance volume of $68 billion as reported by Inside Mortgage Finance—nearly flat from April.
"After an April where volumes had increased for the first time in a year, we had grown modestly more optimistic," the firm said in an industry update. "Now, we believe May results could prove to be a leading indicator of what is shaping up to be the weakest overall origination year in recent memory."
At the same time, FBR remains optimistic for 2015, projecting origination volumes of $1.35 trillion.
Meanwhile, the ongoing weakness in production has caused a shakeup at the top, leaving more room for smaller players as the top four banks took up only a quarter of the market. With the larger bank-based originators putting their focus on providing loans to core customers and abandoning other channels, FBR says mid-sized lenders are poised to gain ground.
At the other hand, with lower volume making it more difficult to turn a profit, the smallest mortgage banks have greater incentive to sell to larger platforms.
Given the current trends, FBR says companies with scalable platforms are the best positioned right now.
"We believe companies that have sizeable mortgage market exposure and scalable origination and servicing platforms remain well positioned as they gain market share or should origination activity increase," the firm said. "With significant negative investor sentiment having driven down earnings expectations for those companies with meaningful exposure to originations, we believe most of the bad news is already in existing stock valuations."