A new report from the Mortgage Bankers Association (MBA) finds that the residential finance market is fundamentally sound and working efficiently. The study, entitled The Residential Mortgage Market and Its Economic Context in 2007, examines the increasingly global market for mortgage debt in the face of a decelerating housing market. The full report can be accessed here.

"The study provides relevant context and perspective on the current state of the economy and its implications for the housing and mortgage markets," says Doug Duncan, MBA's chief economist and senior vice president for research and business development. "In order to understand the developments with respect to trends in mortgage product choice and mortgage delinquency and foreclosure rates, one needs to understand the underlying economic trends.”

Key findings of the study include:

*The U.S. economy will continue to grow in 2007, but at a slower pace growth.

*The housing market will regain its footing by mid-to-late 2007, depending on what measure is used. Home sales and starts will likely begin to increase in mid-2007, but, given the large inventory overhang, prices are unlikely to show any significant increase until late 2007 or early 2008.

*The residential finance market is fundamentally sound and working efficiently. The housing market will continue to benefit from relatively low long-term interest rates. For ARM borrowers, we expect short-term interest rates to be steady going forward.

*Mortgage originations will fall in 2007 relative to 2006 as a result of a decline in home sales and diminished refinance activity.

*Barring any unexpected downturn in the economy, the recent increase in mortgage delinquency rates will likely peak by the end of 2007, but at levels well below those of past peaks. This lower peak will come despite the change in the composition of outstanding loans, namely a larger proportion of subprime loans in recent years.