More and more lenders are projecting a downturn in profit margins as the industry shifts from a refi market to a purchase market.
The share of lenders that believe profit margins will decrease in the next three months increased from 52% from the first quarter to 69% in the second quarter, according to Fannie Mae’s latest Mortgage Lender Sentiment Survey. Meanwhile, 19% expect profits to remain the same, and 11% predict profits will increase.
“Despite elevated optimism toward the US economy, lenders show a cautious outlook for their mortgage business,” said Doug Duncan, senior vice president and chief economist at Fannie Mae. “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.”
Lenders also reported a significantly reduced refinance demand over the past quarter and expect the decline to continue, with their refinance demand growth expectations reaching the lowest level seen since Q4 2018 for GSE-eligible and government loans. The net share of lenders reporting purchase mortgage demand growth over the past three months increased from last quarter across all lender types.
Duncan noted that those who expected a lower profit margin continued to cite competition from other lenders and market trend changes as the primary reasons. “With the shift from refinance to purchase business, some lenders commented that purchase transactions are harder to complete and have lower margins,” he said.
Consequently, some lenders are loosening their underwriting standards. According to the report, the net share of lenders reporting easing credit standards over the quarter has gradually climbed since Q2 2020 across all loan types.
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“Recent economic indicators, however, paint a somewhat more positive picture,” Duncan said. “Though the primary-secondary mortgage spread has continued to narrow, it remains wider than the level seen pre-pandemic, suggesting that lenders are still making profits, though not as much as they did in 2020. Purchase mortgage applications have trended slightly lower in recent weeks; however, they remain fairly strong and higher than the pre-pandemic level, likely because of continued low mortgage rates. Our June National Housing Survey released early this week showed that consumer demand remains strong since ‘home purchase on next move’ is at a survey high, despite the challenges of accelerated home price appreciation and insufficient supply.”