A new report from ""FBR Capital Markets"":http://www.fbr.com/ asserts low rates and high demand will continue to boost profitability in the mortgage banking sector in 2013.
[IMAGE]In a research report released Wednesday, FBR notes that average rates on outstanding mortgages hover between 4.50 percent and 5.00 percent--well above today's historically low rates. According to the firm, this means there is a ""large portion of loans with an economic incentive to refinance.""
While some may point to recent drops in the ""Mortgage Bankers Association's"":http://www.mbaa.org/default.htm (MBA) Refinance Index as proof that the refinance boom is already coming to a close, FBR says otherwise.
""Instead, we argue that there are likely $1 trillion of refinances in an estimated $1.7 trillion to $2.0 trillion overall market this year, and we predict a corresponding bounce in the MBA index,"" the report reads.
[COLUMN_BREAK]""Additionally, assuming rates remain around current levels, we believe that purchase volumes should rise, offsetting any weakness in the refi index,"" the report continued.
FBR estimates there are between $2 trillion and $2.5 trillion in mortgages left to refinance, while current refinance capacity stands at $1.2 trillion to $1.3 trillion, leaving the market constrained. As such, rates would have to move 75 basis points or more to have a significant impact on mortgage banking profitability.
Additionally, FBR expects that despite increased origination capabilities at big players such as ""Bank of America"":https://www.bankofamerica.com/ and smaller firms such as ""Nationstar"":https://www.nationstarmtg.com/, ""Flagstar"":https://www.flagstar.com/, and ""PHH Corporation"":http://corporate.phh.com/phoenix.zhtml?c=187859&p=irol-Corporate, ""capacity will remain constrained as larger originators, like ""Wells Fargo"":https://www.wellsfargo.com/, slowly decrease their market share.""
""Accounting for market share gains almost across the board for smaller players, we estimate that the incremental capacity coming into the market will only make up for what Wells Fargo (and other large originators) is shedding,"" the report says.
Given ""robust purchase volumes, the pipeline of possible refinancings, and limited market capacity,"" FBR expects gain-on-sale margins will remain elevated through this year, supporting ongoing profitability going forward. While there is the risk that dramatic increases in interest rates could crash gain-on-sale margins and origination volumes, the investment bank considers the probability of such an event to be ""largely unlikely given today's lackluster economic environment"" and therefore did not factor the possibility into its models.