Purchase mortgage originations are expected to hit a new record high of $1.54 trillion next year. That forecast, which would be an increase of 8.5 percent over the projected total in 2020, was made at the Mortgage Bankers Association's (MBA's) virtual 2020 Annual Convention and Expo by Mike Fratantoni, Chief Economist and Senior Vice President for Research and Industry Technology; Joel Kan, Associate Vice President of Economic and Industry Forecasting; and Marina Walsh, CMB, Vice President of Industry Analysis. 

While purchase mortgages will gain ground, the three say that, after a nearly 80 percent jump in refinance activity this year, those originations are predicted to slow next year, decreasing by 46.3 percent to $946 billion.

MBA expects that, with record-low mortgage rates driving borrower demand, mortgage originations will total $3.18 trillion in 2020 - the most since a total of $3.81 trillion in 2003. In 2021, mortgage originations are expected to fall to around $2.49 trillion, which would still be the second-highest total in the past 15 years. At $1.54 trillion, next year's purchase originations would eclipse the previous all-time high of $1.51 trillion in 2005. 

Fratantoni said there are caveats to the MBA's forecast. It assumes an effective vaccine will bring the COVID-19 pandemic under control, leading to a gradual economic recovery that is aided by further fiscal stimulus. "The economy, labor market, and housing market have all seen meaningful rebounds since the onset of the pandemic, but there is still profound uncertainty. Additional waves of the virus could lead to further lockdowns and more job market instability," he said. "On the other hand, another pandemic-related stimulus package would result in faster economic growth and additional support for the housing market, albeit with slightly more upward pressure on mortgage rates."

He added, "2021, particularly the second half, should be a year of continued purchase growth and slowing refinance activity."

Mortgage rates are forecast to increase modestly next year. The 30-year fixed-rate mortgage expected to end 2020 at 3.00 percent before increasing to 3.30 percent. It is anticipated that the Federal Reserve will keep short-term rates at zero at least through 2022.  

Kan called the 2020 surge in mortgage originations, even as credit availability has fallen back to 2014 levels, speaks to the uneven nature of the current economic recovery. "The greatest strength in housing demand and applications activity has come from borrowers at the upper end of the market seeking higher-balance loans," said Kan. "The expectation is that credit availability will slowly improve across the spectrum as the economy does over the next year, but some low-income borrowers and first-time buyers will likely face difficulties getting approved for a mortgage."   

The surge in borrower demand due to the record low rates is allowing many lenders to post record production profits, Walsh said. Still, there are continued signs of capacity constraints, as companies grapple with high mortgage activity and insufficient staffing levels. Lenders may also need to prepare for potential rightsizing, given the expectation for refinances to slow over the next two years. 

Servicers, particularly those with FHA portfolios, are facing elevated delinquency rates. Their top concern will be pursuing the most appropriate loss mitigation strategies for post-forbearance borrowers and investors. This will likely result in the operational need for additional loss mitigation personnel and increased servicing costs," Walsh said.  

Despite the operational challenges and pandemic-related uncertainty, Fratantoni expects 2021 to be a strong year for the mortgage market, fueled by low rates, an increase in homebuilding, sizable demand from millennials, and a pandemic-fueled desire for larger homes. 

"As long as the spread of the pandemic is brought under control, the economy should expand around 3 percent next year, allowing the job market to improve, incomes to rise, and home sales to meaningfully increase," he said.