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.”
Tightening of credit standards
“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.”