A plurality of lenders agree that near-term profitability will decrease for the fifth consecutive quarter, according to Fannie Mae’s Mortgage Lender Sentiment Survey (MLSS). In fact, 65% of mortgage lenders believe profit margins will decrease within the next 3 months, up from 46% in the prior quarter, while 31% believe profits will remain the same and 3% believe profits will increase. Competition from other lenders and changing market trends were the top reasons cited amongst lenders for decreased profitability.
"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 Fannie Mae senior vice president and chief economist Doug Duncan.
Across all loan types, more lenders reported reduced consumer demand this quarter over the previous quarter for both purchase and refinance mortgages. Looking ahead, lenders on net expect purchase mortgage demand to remain largely stable, while refinance demand is expected to decrease significantly.
“Mortgage lenders' profitability outlook has significantly weakened over the past several quarters from its early pandemic run-up,” Duncan continued. “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.”
Highlights from the MLSS report show that primary-secondary mortgage spread and loan production income remain elevated. The primary-secondary mortgage spread is the difference between mortgage rates for borrowers (the primary rate) and yields on newly-issued, agency, mortgage-backed securities or MBS (the secondary rate). The primary-secondary mortgage spread averaged 127 basis points in the third quarter of this year, down from its peak of 174 basis points in the third quarter of 2020. Net loan production moved similarly, sitting well below the peak season of Q3 in 2020, but rising in the third quarter of 2021 above the 2019 average.
Consumer demand is expected to remain stable for purchase mortgages as refinances sizzle out. The net share of lenders reporting demand growth for the prior 3 months as well as the next 3 months reached the lowest reading for any fourth quarter over the past 2 years. The direction on the net stayed positive for the past 3 months, with more lenders reporting that demand increased. It stayed neutral for the following 3 months with lenders equally split between upward and downward demand expectations.
For refinance mortgages, the net share of lenders reporting refinance demand growth in the past 3 months and expecting even more growth for the following 3 months decreased significantly from last quarter and last year, across all loan types, reaching the lowest reading in 3 years.
Additionally, lenders expect credit standards to remain relatively the same with the net share reporting an easing of credit standards over the past 3 months and anticipating that trend to continue over the next 3 months.
