Fannie survey: Lenders continue to expect profits to decrease

Mortgage lenders continue to expect less returns in the short term, with 46% surveyed by Fannie Mae indicating that they believe profit margins will decrease in the next three months.

It’s the fourth straight quarter that the government-sponsored enterprise’s Mortgage Lender Sentiment Survey (MLSS) has returned a plurality of mortgage lenders expecting near-term profitability to fall. Another 38% believe profits will remain the same, while just 15% think profits will grow over the next three months. On the bright side, the share of lenders who think profits will decrease is down from 69% in the prior quarter.

“On net, mortgage lenders’ profitability outlook improved slightly from last quarter, although more lenders than not continue to expect profit margins to decline in the months ahead,” said Mark Palim, Fannie Mae vice president and deputy chief economist. “The primary-secondary spread, an indicator of potential profitability, remains wider than the previous decade’s average – a positive sign for lenders – though in August, it was at its narrowest since February, and 53 basis points below the peak seen in August 2020.”

According to Palim, lenders continue to overwhelmingly cite increased competition as the top reason for future profitability concerns, as well as changing marketing conditions. The share of lenders citing personnel costs for their diminished profit margin outlook increased significantly in the second quarter, suggesting, per Palim, that mortgage lenders’ ability to efficiently manage their workforces “will be critical to their bottom lines as competitive pressures remain intense.”

Among lenders with a more positive outlook on near-term profits, government-sponsored enterprise pricing and policies and ongoing strong consumer demand were the top reasons given for optimism.

Additionally, more lenders reported reduced consumer demand for purchase mortgages and increased demand for refinances in the second quarter. Still, lenders appear to expect purchase demand to grow moving forward, according to Fannie Mae.

“Mortgage lenders appear to have adopted a more neutral posture, reporting to us via the MLSS mixed expectations for purchase and refinance mortgage demand over the next three months,” said Palim. “In the third quarter, more lenders than not reported expectations that purchase mortgage demand will continue to grow, though the total share expecting such growth fell substantially compared to the previous quarter.

“Meanwhile, a plurality of mortgage lenders expects refinance activity to continue to wane from the highs of the past year and a half,” Palim continued. “Even so, their outlook on likely refi volumes was improved compared to the prior quarter. Of the lenders who expect purchase mortgage demand to decrease in the coming months, high home prices and a limited supply of homes for sale were the primary reasons given – these were also among the top reasons provided by the 63% of consumers who believe it’s a ‘bad time to buy a home,’ according to our latest Home Purchase Sentiment Index results.”


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