Lenders project more profit margin compression next quarter

With refinance demand trending downward and rates looking to rise, almost two-thirds of mortgage lenders expect profitability to decrease in the short term, according to Fannie Mae’s Q4 2021 Mortgage Lender Sentiment Survey (MLSS).

Sixty-five percent of lenders believe that profit margins will drop in the next three months, the survey revealed. That’s up from 46% in the prior quarter, marking the fifth consecutive three-month period that a plurality of lenders think profit margins will wane.

Just 3% of lenders, meanwhile, expect profits to grow, with another 31% anticipating that profits will remain the same.

“This quarter’s MLSS results suggest that the housing market may be poised to return to a more ‘normal’ state in the new year, following the boom experienced over the past two years due to historically low mortgage rates and pandemic-related changes in homebuyer behavior,” said Doug Duncan, senior vice president and chief economist at Fannie Mae. “Mortgage lenders’ profitability outlook has significantly weakened over the past several quarters from its early pandemic run-up.”

On net, lenders expect purchase mortgage demand to stay stable moving forward and refinance demand to significantly drop. For refinance mortgages specifically, both the net share of lenders reporting demand growth over the past three months and the net share expecting demand growth over the next three months fell substantially quarterly and annually. Both metrics, in fact, reached their lowest levels since the fourth quarter of 2018.

Partly because of the expected shift in market focus from refi to purchases, market trend changes were cited as one of the top reasons lenders expected profitability to dip. Forty-one percent of lenders indicated that market trend changes were a key reason they projected a profit margin drop, second only to competition from other lenders (76%). Consumer demand, at 31%, was third, reaching its highest reading since the fourth quarter of 2019.

Despite the pessimistic survey results, Duncan stressed that he still expects a profitable near-term outlook for lenders.

“However, net loan production income levels, as reported by the Mortgage Bankers Association, and the width of the current primary-secondary spread (an indicator of potential profitability) allow us to level-set. With both still slightly above pre-pandemic levels, we expect lenders to continue investing in capacity efficiency and process streamlining to maintain profitability despite the thinner-margin environment.”


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