Sixty-nine percent of lenders believe profit margins will decrease in the three months ahead, according to the Q2 2021 Mortgage Lender Sentiment Survey from Fannie Mae.

That’s down from 52% in the quarter prior, making it three straight quarters in which an increased share of lenders anticipate profit margins to fall. Just 11%, on the other hand, believe profits will grow, while 19% believe profits will remain the same.

“Despite elevated optimism toward the U.S. economy, lenders show a cautious outlook for their mortgage business,” said Doug Duncan, Fannie Mae 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 profit margins to fall continued to cite the same primary reasons as in the previous two quarters: competition from other lenders and market trend changes. For one thing, lenders reported a substantial decline in refinance demand over the past three months. In fact, the net share of lenders reporting refi demand growth over the prior three months turned net negative for the first time since Q1 2019. For GSE-eligible and government loans, refi demand growth over the past quarter sank to the lowest reading since Q4 2018.

Lenders also expect that refi demand decline to continue, with refinance demand growth expectations also falling to their lowest level since Q4 2018.

“With the shift from refinance to purchase business, some lenders commented that purchase transactions are harder to complete and have lower margins,” Duncan added.

Still, Duncan said that lenders are still reaping healthy profits as the housing market continues to stay hot and consumer demand for homebuying remains high.

“Recent economic indicators … paint a somewhat more positive picture,” he 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 … 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.”