This was kind of a bizarre year for the mortgage market. In the first half of the year, you had a decent number of home sales keeping mortgages for purchases stable, thanks to the home buyer credit. In the second half of the year, that changed as demand crumbled when the credit was withdrawn. At the same time, you had very low mortgage interest rates throughout much of the year cause a mini-refinancing boom. 2011 will look very different, as the housing demand continues to struggle and mortgage interest rates have begun rising.
Michele Lerner has a pretty good list of seven mortgage trends we can expect to see in 2011, over at Investopedia. A few are relatively trivial if you assume her first trend, rising mortgage interest rates, will hold. That will predictably continue to lower the demand for mortgages and refinancing, while increasing the portion of purchase applications. Lerner's last three predictions are a little more interesting, however.
First, she says that jumbo mortgages, those which exceed the conforming limit (between $417,000 and $729,750, depending on location) will become cheaper. Lerner notes that these mortgage interest rates were higher than conforming rates in 2009 and early 2010, but began to fall in the latter part of this year. This mostly has to do with the funding available for mortgages. Since the mortgage-backed securities (MBS) market died with the financial crisis, banks had to rely on government sources of financing. As investors become more comfortable again with private MBS, jumbo loans will become cheaper. For this to happen in 2011, the MBS market will have to improve accordingly.