More Mortgage Lenders Expecting Profits to Shrink in Coming Months
Written By: Joel Palmer, Op-Ed Writer
Mortgage lenders continue to expect weaker profits in months ahead, according to the latest Fannie Mae industry survey.
For the third consecutive quarter, an increased share of mortgage lenders responded to Fannie’s Mortgage Lender Sentiment Survey that they expect profit margins to retreat further from last year's highs.
According to the second quarter survey, 69 percent of lenders believe profit margins will decrease in the three months ahead compared to 52 percent in the prior quarter.
About 11 percent of respondents said they still expect an increase in profits going forward, while 19 percent believe they will remain the same.
Looking at consumer demand over the prior three months, across all loan types, more lenders reported increased demand for purchase mortgages but significantly reduced refinance mortgage demand.
In fact, for refinance mortgages, the net share of lenders reporting demand growth over the prior three months turned net negative for the first time since the first quarter of 2019. It also reached the lowest reading since the fourth quarter of 2018 for GSE-eligible and government loans.
Looking ahead, lenders’ expectations for purchase demand growth over the next three months remain relatively strong but are down slightly from last quarter for GSE-eligible and government loans. On the other hand, lenders continue to anticipate falling refinance demand across all loan types.
"Despite elevated optimism toward the U.S. economy, lenders show a cautious outlook for their mortgage business," said Doug Duncan, Fannie Mae senior vice president and chief economist. "This quarter, the largest net percentage of lenders in the survey’s seven-year history are expecting a decrease in their profit margin outlook.”
According to the report, lenders who expect shrinking margins cite competition and market trend changes as the primary causes.
“With the shift from refinance to purchase business, some lenders commented that purchase transactions are harder to complete and have lower margins,” Duncan said.
"Recent economic indicators, however, paint a somewhat more positive picture," continued Duncan. "Though the primary-secondary mortgage spread has continued to narrow, it remains wider than the level seen pre-pandemic, suggesting that lenders are still making profits, though not as much as they did in 2020.”
The report also noted that as interest rates stabilize, it will continue to compress mortgage spreads.
After the 40 basis point run-up of the 10-year Treasury in the first quarter of 2021, peaking at 1.72 percent in the first week of April, the 10-year has stabilized in the range of 1.55 percent and 1.65 percent.
The 30-year fixed contract rate has also experienced a similar stabilization, peaking at 3.18 percent in the first week of April, but now hovering around 3 percent. It event reached as low as 2.94 percent in mid-May.
While both the 10-year Treasury and 30-year fixed contract rate have fallen from their peaks in early April, the contract rate has fallen further than the 10-year. Given this movement, the primary spread compressed further in May, falling eight basis points to 134 basis points, the lowest level since April 2010, and well below the prior decade's average of approximately 170 basis points.
Fannie’s survey also showed that lenders are easing credit standards, and a slightly higher share of lenders expect that trend to continue for the next quarter.
About the Author
As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.
