Mortgage lenders expect near-term profitability to decrease for the fourth consecutive quarter, according to Fannie Mae’s Mortgage Lender Sentiment Survey. However, confidence seems to be improving marginally with only 46% of mortgage lenders believing that profit margins will decrease in the next three months, compared to 69% in the previous quarter. The remaining 38% believe profits will remain the same and 15% believe profits will increase.
Why are lenders so pessimistic about profitability this quarter? The top reasons cited in the survey were increased competition and changing market conditions. Meanwhile, lenders with a more positive outlook for this quarter cited GSE policies and pricing along with consumer demand as their top reasons.
Additionally, more lenders reported a decrease in consumer demand for purchase mortgages this quarter, but reported an improved demand for refinance mortgages. However, the change in mortgage demand within the past three months, as well as what is to be expected in the next quarter, remain net positive for purchase mortgages. Change in refinance demand, on the other hand, will remain slightly negative.
“Mortgage lenders appear to have adopted a more neutral posture, reporting to us via the MLSS mixed expectations for purchase and refinance mortgage demand over the next three months,” said Fannie Mae vice president and deputy chief economist, Mark Palim. “In the third quarter, more lenders than not reported expectations that purchase mortgage demand will continue to grow, though the total share expecting such growth fell substantially compared to the previous quarter.”
A plurality of mortgage lenders expect refinance activity to continue waning from highs of the past year and a half, according to Palim. Still, their outlook of refinance volume has improved since the prior quarter. Other lenders, who expect purchase activity to wane in the coming months, reason that high home prices and a limited supply of homes for sale will reduce consumer demand. According to Fannie Mae’s latest Home Purchase Sentiment Index results, those were the top reasons cited by 63% of consumers who believe it's a “bad time to buy a home.”
“On net, mortgage lenders' profitability outlook improved slightly from last quarter, although more lenders than not continue to expect profit margins to decline in the months ahead,” Palim continued. “The primary-secondary spread, an indicator of potential profitability, remains wider than the previous decade's average – a positive sign for lenders – though in August it was at its narrowest since February and 53 basis points below the peak seen in August 2020. While lenders continue to overwhelmingly cite increased competition as their primary concern regarding future profitability, the share citing personnel costs for their diminished profit margin outlook increased significantly, suggesting that mortgage lenders' ability to efficiently manage their workforces will be critical to their bottom lines as competitive pressures remain intense.”
For additional information and analysis, read the Q3 2021 MLSS summary research report.
