IRVINE, CA-While 2012 was a stronger year for mortgage originations, volume wasn't based on normal demand for new mortgages, but on refinances, said Mark Fleming, chief economist for CoreLogic, a residential-property information, analytics and services provider here, in a recent MarketPulse report. This dominance of refinance originations is troubling for the long run because as interest rates are unlikely to drop further, participation by these borrowers will subside and demand for refinances will slowly decline over the next two years, Fleming predicts.

However, the purchase mortgage market is expected to rise slowly as consumer confidence and household formation increase. In fact, according to Fleming, full-year 2012 US Census Bureau data indicates that household formations increased by nearly 1 million, the highest rate since 2006. But, given that the purchase market is rising from a very low bottom, it will take some time to replace the substantial amount of current refinance demand.

“In addition, the interest rates that borrowers who are refinancing are able to lock in now likely mean a refinance again in the longer term,” said Fleming. “Therefore, it is reasonable to assume that turnover of the mortgage stock will slow and the importance of purchase mortgages will rise. In the intermediate term, this will likely stimulate competitive pressure among lenders to squeeze profits and relax credit standards.”