NEW YORK (TheStreet) -- Mortgage origination volumes could fall as much as 30% in 2014, driven by a dropoff in refinance activity as mortgage interest rates rise, according to a report Tuesday by KBW analysts Bose George and Jade Rahmani.

The analysts forecast residential mortgage origination volume of $1.15 trillion in 2014, down from almost $1.8 trillion in 2013. That is slightly lower than the Mortgage Bankers Association's forecast of $1.2 trillion.

Purchase activity, however, is expected to be strong with a growth of more than 10%.

Increased competition for business should also pressure gain-on-sale margins, the spread that lenders earn from selling mortgages in the secondary market. KBW expects margins to decline by another 15% in 2014.

The outlook for the mortgage sector as a whole is mixed. "We generally expect declining earnings from the mortgage originators and title insurers, more stable earnings from the mortgage servicers and increasing earnings from the mortgage insurers," the analysts wrote.

KBW is positive on mortgage insurers including Radian (RDN), MGIC Investment (MTG) and Essent Group (ESNT), which are poised to benefit from the continuing shift away from the Federal Housing Administration. It is also bullish on holders of mortgage servicing rights such as Home Loan Servicing Solutions (HLSS)and New Residential Investment Corp (NRZ).

It is neutral on mortgage servicers including Ocwen (OCN) and mortgage banks, with the exception of Penny Mac Mortgage Investment Trust (PMT), on which it has an outperform rating based on valuation.

KBW also continues to believe the common shares of Fannie Mae (FNMA) and Freddie Mac (FMCC) are worthless and that housing reform is unlikely until at least 2015.

-- Written by Shanthi Bharatwaj in New York.

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