The Mortgage Bankers Association (MBA) today upped its 2004 forecast for loan originations to $2.5 trillion from $2 trillion previously.

The MBA attributed the increase to continued low interest rates expected to result in a record high loan origination market for purchase loans and a refinance market that is surprisingly strong even compared to the record set last year.

MBA predicts that purchase home mortgages will comprise 54% of total originations, which is equivalent to $1.4 trillion. These numbers are up from the $1.3 trillion previously forecast. Refinancings are expected to comprise $1.1 trillion in originations, which is much more than the $0.7 trillion originally expected.

In MBA’s new forecast, refinancings comprise 46% of originations this year. To put things in context, the only two years that refinancings took up a higher percentage of originations were 2003 (66%) and 2002 (62%).

The updated forecast is mainly based on MBA's latest outlook on interest rates. The MBA currently projects the 10-year Treasury rate will average only 3.9% in 2Q04 and 4.1% in 3Q04. There is also the aspect of low mortgage rates. For instance, MBA expects the average 30-year fixed mortgage rate to drop to 5.4% in the second quarter of 2004 and then rise slowly.

Doug Duncan, chief economist at the MBA, was quoted as saying that while the rebound in the economy has been strong, rates have remained low for several reasons: productivity gains and the effect of imports have held down inflation; rising corporate profits lessened the need to fund new business expansion through debt; and the job recovery hasn't been strong enough to drive up rates. Because of these factors, investors — who previously believed the significant spread between short-term and long-term rates would narrow — are now expecting a decline in long-term rates instead. MBA, said Duncan, has been anticipating that the Fed would wait until late this year before raising short-term interest rates.

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