Third Quarter Volume Slips

Small-balance originations declined 8.3% sequentially in the third quarter of last year to $31.3 billion, as the turmoil in the capital markets began to hit close to home. As of this latest period, year-to-date originations have crested $100 billion, guaranteeing another solid full year for originations.

That said, there are headwinds to success ahead. Loan pricing remains volatile, cap rates are beginning to rise and lenders are more risk averse, among other unfavorable conditions. It comes as no surprise then that purchase mortgages for small-balance loans are down 32% year-over-year. Any short-term stimulus will likely come from refinance loans, which have been growing in importance as interest rates decline. In this segment, the volume is up 1.6% since this time last year.

Our research also indicates that small-balance originations have been particularly vulnerable in metropolitan areas hard hit by the housing slump. Such markets include L.A., down 30.5% from the corresponding period in 2006 as well as Orange County (-19.7%), Phoenix (-16.7) and San Diego (-13.2%) among others. On the other hand, stronger markets such as Seattle (+12.3) and Brooklyn, NY (+17.9%) continue to be driven by strong local economies.