The Mortgage Bankers Association predicts purchase mortgage originations will grow in 2021 while the meteoric increase in refinance activity will taper off.

The prediction came in its annual forecast for the coming year, presented virtually at its 2020 Annual Convention & Expo by MBA Chief Economist Mike Fratantoni, Associate Vice President Joel Kan and Vice President Marina Walsh.

Across the country, the MBA predicts purchase originations will grow 8.5 percent to a new record of $1.54 trillion in 2021. After a 70.9 percent jump in activity in 2020, MBA analysts anticipate refinance originations will slow next year, decreasing by 46.3 percent to $946 billion.

With record-low mortgage rates driving sustained borrower demand, MBA forecasts mortgage originations to total $3.18 trillion in 2020 – the most since 2003 ($3.81 trillion). At the same time, mortgage originations are expected to fall to around $2.49 trillion in 2021, 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.

The forecast assumes an effective vaccine will bring the COVID-19 pandemic under control, leading to a gradual economic recovery in the second half of 2021 that is aided by further federal 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,” Fratantoni said in a statement. “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.”

The baseline forecast for mortgage rates is a modest increase next year, with the 30-year fixed-rate mortgage expected to end 2020 at 3 percent, before increasing to 3.3 percent. On the monetary policy front, the MBA expects that the Federal Reserve will keep short-term rates at zero at least through 2022.

Kan said the surge in mortgage originations this year, despite mortgage credit availability tightening 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,” he said in a statement. “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.”

Walsh said that many mortgage lenders are posting record production profits in 2020, fueled by a surge in borrower demand from record-low rates. And yet, there are continued signs of capacity constraints, as companies grapple with high mortgage activity and insufficient staffing levels. At the same time, mortgage lenders may need to prepare for potential rightsizing, given the expectation for refinances to slow over the next two years.

On the servicing side of the business, elevated borrower delinquency rates – particularly for FHA borrowers – remain a concern. Top of mind for servicers will be pursuing the most appropriate loss mitigation strategies for post-forbearance borrowers and investors.

“Servicers will remain busy in 2021 helping borrowers exit mortgage forbearance and into longer-term solutions. This will likely result in the operational need for additional loss mitigation personnel and increased servicing costs,” Walsh said in a statement.

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 desire – as a result of the pandemic – of more households seeking 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,” Fratantoni said in a statement.