Mortgage Lenders Expect Higher Purchase Demand, Steady Profits
Written By: Joel Palmer, Op-Ed Writer
According to the latest Fannie Mae Mortgage Lender Sentiment Survey, 44 percent of lenders believe profit margins will remain strong, with another 27 percent predicting they will even rise.
That’s less optimistic than the previous quarter, when 53 percent of respondents expected increasing profit margins.
"Mortgage lenders' profit margin outlook remains steady following gains in the first three quarters of 2019," said Fannie Mae Senior Vice President and Chief Economist Doug Duncan.
"Credit standard trends also continue to hold steady amid the largely unchanged profitability outlook. Lower interest rates, which drove the refinance boom, have been the engine driving mortgage demand growth this year. Lenders' purchase and refinance demand expectations align with our own forecast: With interest rates stabilizing in 2020, we expect a decline in refinance activity and slightly higher purchase activity."
Third-quarter earnings for mortgage lenders grew 81 percent on a per-loan basis compared with the average quarterly results over the last three years.
According to the MBA's Quarterly Mortgage Bankers Performance Report, lenders reported third-quarter 2019 earnings of $1,924 per loan, versus a third-quarter average of $1,061 over the last three years.
Mortgage spreads remain elevated, consistent with continued optimism in mortgage lenders' profitability outlook. The average primary mortgage spreads (FRM 30 contract rate versus 10-year Treasury) came in at 189 basis points in November, above the long-run average of 168 basis points.
Lenders responding to the Fannie survey expect strong demand for purchase mortgages to buoy profitability, even though refinance demand will soften due to rising mortgage rates going forward.
For purchase mortgages, the net share of lenders reporting demand growth over the prior three months, as well as the net share reporting growth expectations for the next three months, reached the highest readings for any fourth quarter since the survey began in 2014.
Respondents who anticipate lower profit margins cited competition from other lenders as the main reason. Market trend changes was the second most cited reason for a decreased profit margin outlook.
Overall, mortgage lenders are confident about the economy, with 76 percent responding that the U.S. economy is on the right track and only 17 percent saying it’s on the wrong track.
When asked about home prices, 44 percent of respondents expect them to increase in the next 12 months, while 45 percent said they would hold steady.
The percentage of respondents who think it's easy to obtain a mortgage has risen steadily in the last three years. In the fourth quarter, 60 percent said it is easy, with the remaining 40 percent indicating it’s difficult.
The pace of credit easing remained similar to last quarter. Overall, most lenders reported no major changes in their underwriting credit standards for the prior three months and expected no major changes for the next three months.
The fourth quarter survey was completed by 188 senior executives, representing 168 lending institutions.
About the Author
As an NAMP® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.
