Mortgage Lenders' Profit Outlook Dips
Written By: Joel Palmer, Op-Ed Writer
A majority of lenders surveyed by Fannie Mae expect profit margins to decrease in the months ahead.
According to Fannie’s first-quarter Mortgage Lender Sentiment Survey, 52 percent of lenders believe profit margins will decrease. That’s less than the 48 percent of surveyed lenders who had the same sentiment in the prior quarter.
Only 15 percent of surveyed lenders in the first quarters thought profit margins will increase in the coming months. The remaining 33 percent think they will remain unchanged.
Lenders expect higher demand for both purchase mortgages and refinances for the next three months, after both types of loans had decreasing demand in the previous quarter. Purchase mortgage growth is expected to grow substantially, while lenders expect just slight growth for refinances.
The two reasons cited for the sentiment toward lower profit margins were competition and the continued shift away from refinance volume.
"Despite continued strong expectations for purchase mortgage demand moving forward, many lenders are signaling caution about their profitability and market competitiveness," said Doug Duncan, Fannie Mae senior vice president and chief economist. "This quarter, the largest net percentage of lenders in the survey history are expecting a decrease in their profit margin outlook.”
The report also noted that mortgage spreads are continuing to compress below the long-run average.
After peaking in April 2020, mortgage spreads narrowed steadily. In February 2021, as the 10-year Treasury increased, the average primary mortgage spread (FRM 30 contract rate versus 10-year Treasury) came in at 155 basis points, below the levels seen prior to the pandemic and below the prior decade's average of approximately 170 basis points.
The quick ascent of the 10-year Treasury has already pushed up mortgage rates, with the 30-year fixed contract rate above 3 percent for the first time since last July.
“The recent rise in the 10-year Treasury yield is putting some upward pressure on mortgage rates,” said Duncan. “Some lenders commented that for now they are willing to absorb some of these costs to maintain volume. However, in the longer term, continued upward pressures on interest rates would likely dampen home sales and mortgage originations as lenders raise mortgage rates. This, in turn, might push lenders to reduce their production capabilities."
The net share of lenders reporting easing credit standards over the prior three months across all loan types has continued its upward trend, after reaching a survey low a year ago.
In other Fannie Mae news last week, the company sent a letter informing lenders of a policy update requiring loans secured by a second home or investment property must now be delivered as a Desktop Underwriter loan with an Approve/Eligible recommendation.
Fannie said the change is due to “recent amendments to our senior preferred stock purchase agreement with Treasury” that “impose additional risk criteria” on acquired loans. One of those restrictions is a 7 percent limit on the acquisition of single-family mortgage loans secured by second homes and investment properties.
The only exception to the new policy is high LTV refinance loans that are manually underwritten in accordance with the Alternative Qualification Path and delivered with Special Feature Code 840.
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.
