After six consecutive quarters of bullish profitability predicitons, the net profit margin outlook for mortgage lenders crept into negative territory in the fourth quarter.

In Q4 2020, Fannie Mae revised its mortgage lender sentiment outlook from optimistic to pessimistic as lenders take a more cautious approach.

“Moving into 2021, lender sentiment paints a more cautious picture, aligning neatly with our recently reported consumer-side sentiment expectations, which appear to have plateaued, and supporting our forecast for a more modest pace of housing growth,” said Doug Duncan, senior vice president and chief economist at Fannie Mae.

Almost half (48%) of lenders believe profits will decrease and 33% projected profits will stay the same, according to the survey. Meanwhile, the number of lenders with optimistic profitability expectations were down from 48% in Q3 to just 19% in Q4.

“Consistent with key industry indicators, the fourth quarter MLSS results support the strength of the mortgage industry we’ve seen in 2020, despite the pandemic,” Duncan said. “The net share of lenders reporting purchase demand growth for the past three months reached a new survey high for GSE-eligible loans. For refinance mortgages, although the net share of lenders reporting demand growth for the prior three months dipped slightly from last quarter’s high across all loan types, it has remained at a historically high level. We currently expect loan origination volume to total $4.1 trillion in 2020, the highest on record since 2003.”

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Survey Highlights
Mortgage spreads

  • Mortgage spreads have moderated after peaking in April. In November, the average primary mortgage spread (FRM 30 contract rate versus 10-year Treasury) returned to pre-pandemic levels of 190 basis points as the 10-year Treasury increased. However, mortgage spreads remain above the long-run average of around 170 basis points.

Purchase demand

  • For purchase mortgages, across GSE-eligible and government loans, the net share of lenders reporting demand growth over the past three months hit a new survey high for GSE-eligible loans and the highest fourth-quarter reading for government loans.
  • However, demand growth expectations for the next three months fell from last quarter. Still, GSE-eligible and government loan expectations reached the highest readings for any fourth quarter in the survey’s history (since 2014).

Refinance demand

  • For refinance mortgages, the net share of lenders reporting demand growth over the prior three months dropped slightly across all loan types from the previous quarter.
  • Similarly, refinance demand growth expectations, on net, fell significantly from last quarter across all loan types but remain on par with the levels seen in the Q4 2019 survey.

Tightening of credit standards

  • Overall, lenders on net continued to report tightening credit standards for the prior three months, though significantly less so compared to last quarter. Most lenders anticipate credit standards to remain mostly unchanged over the next three months.

“Refinance demand growth expectations for the next three months fell significantly from last quarter across all loan types. Additionally, lenders’ profitability outlook has weakened. The resurgence of COVID-19 cases and uncertainty around the economic recovery path pose risks to the pace of housing growth,” Duncan said. “Pending sales and purchase mortgage applications have recently pulled back from highs as pent-up demand from the spring has receded. Tight inventories, along with higher home prices, will likely continue to restrain sales, and the recent compression of the primary/secondary mortgage spread appears to confirm mortgage lenders’ lower profitability expectations.”