Vast Majority of Lenders Expect Mortgage Profitability to Decrease

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For the third consecutive quarter, an increased share of mortgage lenders expect profit margins to retreat further from last year’s highs, according to Fannie Mae’s Q2 2021 Mortgage Lender Sentiment Survey (MLSS).

According to the second quarter survey, 69% of lenders believe profit margins will decrease in the three months ahead compared to 52% in the prior quarter, while 19% believe profits will remain the same and 11% believe profits will increase.

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 and 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, while refinance demand expectations fell significantly across all loan types.

“Despite elevated optimism toward the U.S. economy, lenders show a cautious outlook for their mortgage business,” says Doug Duncan, Fannie Mae’s 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. This is the third quarterly decline from the lender profitability highs of 2020. Those who expected a lower profit margin continued to cite competition from other lenders and market trend changes as the primary reasons.”

For purchase mortgages, the net share of lenders reporting demand growth over the past three months increased from last quarter across all lender types. Looking ahead, lenders’ demand growth expectations over the next three months are slightly down for GSE-eligible and government loans and about even for non-GSE-eligible loans.

For refinance mortgages, the net share of lenders reporting demand growth over the prior three months dropped significantly from last quarter across all loan types, turning net negative for the first time since Q1 2019 and reaching the lowest reading since Q4 2018 for GSE-eligible and government loans. Refinance demand growth expectations on net for the next three months also fell significantly across loan types, reaching the lowest levels seen since Q4 2018.

The net share of lenders reporting easing credit standards over the prior three months has gradually climbed since Q2 2020 across all loan types. This quarter, the net-easing share for GSE-eligible loans remained relatively flat from last quarter. For the next three months, the net share of lenders expecting easing ticked up slightly from last quarter for non-GSE-eligible loans but remained relatively steady for GSE-eligible and government loans.

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