Fannie Mae: Mortgage Lenders Expect to See Strong Profit Margins in Q4

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Mortgage lenders’ profit margin outlook for the next three months remains on solid ground, according to Fannie Mae’s fourth quarter Mortgage Lender Sentiment Survey.

About 44% of lenders believe profit margins will remain about the same compared with the third quarter, while 28% believe profits will fall and 27% believe profits will rise.

Strong consumer demand, particularly among purchase mortgages, continues to buoy lenders’ overall expected profitability, even as they expect refinance demand to soften amid a more stable interest rate environment.

“Mortgage lenders’ profit margin outlook remains steady following gains in the first three quarters of 2019,” says Doug Duncan, senior vice president and chief economist for Fannie Mae, in the report. “Credit standard trends also continue to hold steady amid the largely unchanged profitability outlook.

“Lower interest rates, which drove the refinance boom, have been the engine driving mortgage demand growth this year,” Duncan adds. “Lenders’ purchase and refinance demand expectations align with our own forecast: With interest rates stabilizing in 2020, we expect a decline in refinance activity and slightly higher purchase activity.” 

According to the Mortgage Bankers Association’s Quarterly Mortgage Bankers Performance Report, on a per loan basis, lender’s net production income has been on the rise over the first three quarters of 2019. In the third quarter, mortgage lenders saw an average profit of $1,924 per loan, versus an average of $1,061 over the last three years.

Mortgage spreads remain elevated, consistent with continued optimism in mortgage lenders’ profitability outlook. The average primary mortgage spreads (30-year fixed-rate mortgage contract rate versus 10-year Treasury) came in at 189 basis points in November, above the long-run average of 168 basis points.

For purchase mortgages, across all loan types (GSE-eligible, non-GSE-eligible, and government), the net share of lenders reporting demand growth over the prior three months, as well as the net share reporting growth expectations for the next three months, remained positive and reached the highest readings for any fourth quarter in the survey’s history.

For refinance mortgages, across all loan types, the net share of lenders reporting demand growth over the prior three months continued the upward trend that began in the first quarter and reached new survey highs since the first quarter of 2014.

Demand growth expectations on net for the next three months fell significantly from the survey highs of last quarter, but the net share of lenders that expect refinance volumes to increase remains well above shares observed a year ago across all loan products.

The report also shows the pace of credit easing is similar to the third quarter. Overall, most lenders reported no major changes in their underwriting credit standards for the prior three months and expected no major changes for the next three months.

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