Observers of the housing market can breathe a sigh of relief, with strong economic growth projected for 2006 and moderate growth in 2007, a mortgage banking group said in its long-term forecast released today.

The Mortgage Bankers Association is predicting growth of 3.5 percent in the gross domestic product for 2006, with moderate, below-trend growth of 3.3 percent in 2007, the group said

Total residential mortgage production in 2006 will be $2.24 trillion, the fifth-biggest year on record, but a 19.5 percent decrease from 2005.

Observers of the housing market can breathe a sigh of relief, with strong economic growth projected for 2006 and moderate growth in 2007, a mortgage banking group said in its long-term forecast released today.

The Mortgage Bankers Association is predicting growth of 3.5 percent in the gross domestic product for 2006, with moderate, below-trend growth of 3.3 percent in 2007, the group said

Total residential mortgage production in 2006 will be $2.24 trillion, the fifth-biggest year on record, but a 19.5 percent decrease from 2005. Existing-home sales will probably fall by 4.7 percent in 2006 and by 4.4 percent in 2007, remaining flat in 2008, the association said.

New-home sales will likely drop 4.3 percent in 2006 and 4.9 percent in 2007, according to the MBA.

“We expect economic growth to remain solid in 2006, but we will begin to see below-trend growth for 2007,” said Doug Duncan, the MBA’s chief economist. Duncan predicted housing would decline modestly compared to 2005, its fifth consecutive record year, and house appreciation rates would be moderate compared to recent years.

The MBA predicted that interest rates, one of the most important factors affecting the real estate industry, would rise to about 6.4 percent for 30-year fixed-rate mortgages by the end of 2006 and through 2007. Duncan expects the Federal Reserve to raise interest rates two more times in 2005 and then halt the tightening cycle.

Yield on Treasury notes is expected to gradually rise to 4.8 percent by the end of 2006, remaining there through 2007, the association said.

“Long-term rates, albeit rising, will remain relatively low, supporting residential and commercial real estate finance activity,” Duncan said. With below-trend economic growth in 2007, the MBA believes the federal funds rate will be lowered in late 2007.

Duncan noted that the labor market remains strong nationally but the devastating impacts of the hurricanes in the Gulf region continue to negatively impact the area. The economist said inflation will increase slightly this year, but will remain under control. Duncan expects the Federal Reserve to raise the short-term funds rate two more times and then halt the tightening cycle, the economist said during a press briefing.

Asked about the subprime loan industry, generally defined as loans to borrowers with less than stellar credit, Duncan said the association does not make separate predictions about subprime loans because there is no strict definition for such loans.

However, he said he believes such loans will continue to comprise about a quarter of the market, Duncan said. “As you know, it’s been the largest growth area within the industry.”

Duncan said the association expects to see a flat yield curve, meaning that the difference between interest rates on short-term and long-term loans is not very large. Flat yield curves can make it harder for banks to make money on loans.

Asked, “Do you think a flat yield curve will wipe out all your members except WaMu (Washington Mutual) and Countrywide?” Duncan responded, “Banks are more sophisticated with hedging strategies in our broader and deeper capital market today.” The economist said that though a flat or inverted curve was once thought of as a precursor to recession, “we don’t think it is now.”

A proposal by U.S. Rep. Richard Baker, R-La., for a governmental agency to buy flood-damaged homes and pay off mortgages in hurricane-affected areas was opposed today by the Bush administration. Asked where foreclosures are going in the hurricane-affected area, Duncan said, “We will really pay attention to the State of the Union address to see what the president is going to propose in a plan for rebuilding those devastated areas,” noting that the MBA “has been supportive of Congressman Baker’s concept.”

Duncan said until another proposal comes along, the MBA would continue to “put all our efforts behind moving it (Baker’s proposal) along.”

In 2006, the MBA will push Congress to pass legislation reforming government-sponsored enterprises Fannie Mae and Freddie Mac and to allocate the resources needed to fight mortgage fraud, the association said, as well as preserving the mortgage interest tax deduction.

“Fraud against mortgage lenders is a key priority,” said Regina M. Lowrie, MBA chairman and president of Gateway Funding Diversified Mortgage Services, during the briefing.

The MBA plans to seek $6.25 million in dedicated funding for 30 new FBI field investigators, two new dedicated prosecutors at the Department of Justice to coordinate prosecution efforts with the U.S. Attorney’s Office, and $750,000 to support FBI Interagency task forces in the areas with the 15 highest concentrations of mortgage fraud.

The Federal Bureau of Investigation has said there is a “growing epidemic of mortgage fraud” in the United States, with reported losses from such fraud soaring to more than $1 billion in the fiscal year 2005, up from $429 million in 2004.

“As you start to see competition increase and volume shrink, that’s when lenders are looking to keep their volumes up and won’t be looking at the loans as closely,” Lowrie said in answer to a question.

“It is critical for our industry to move the quality control process up before the loan,” said Lowrie. She also said communication within the industry must improve so that “bad actors” don’t leave one company only to move to another and continue bad practices.

The MBA chairman said, “I don’t see any indication without the support of the industry fighting back against mortgage fraud that you are going to see a decrease.”

***

Send tips or a Letter to the Editor to janis@inman.com or call (510) 658-9252, ext. 140.

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