Lenders Expect Profits To Decline As Market Returns To “Normal State”

Lenders don’t feel optimistic about their future profit margins, with 65% reporting they believe their profit margins will shrink in the next three months, according to Fannie Mae’s Mortgage Lender Sentiment Survey.

The share of lenders who feel pessimistic about future profits rose by 19% from Q3, citing competition from other lenders and changing market trends. If they prove right, next quarter will mark the fifth consecutive quarter of profit declines.

“This quarter’s MLSS results suggest that the housing market may be poised to return to a more ‘normal’ state in the new year, following the boom experienced over the past two years due to historically low mortgage rates and pandemic-related changes in homebuyer behavior,” said Fannie Mae Senior Vice President and Chief Economist Doug Duncan.

“Mortgage lenders’ profitability outlook has significantly weakened over the past several quarters from its early pandemic run-up. However, net loan production income levels, as reported by the Mortgage Bankers Association, and the width of the current primary-secondary spread (an indicator of potential profitability) allow us to level-set. With both still slightly above pre-pandemic levels, we expect lenders to continue investing in capacity efficiency and process streamlining to maintain profitability despite the thinner-margin environment.”

Lenders reported waning demand across all loan types this quarter. For purchase mortgages, the net share of lenders reported growth this quarter and expect continued growth in the next three months, though that share shrank from the last survey.

Though respondents believe purchases will even out, they are expecting refinance demand to continue to drop significantly. Refinance expectations hit their lowest reading since Q4 2018.

Lenders also said credit standards loosened this quarter and expect them to stay flat moving forward.

Consumer sentiment regarding the housing market is low from a buyer’s perspective, with only 29% of consumers reporting that it’s a good time to buy in Fannie Mae’s most recent Home Purchase Sentiment Survey. But by the numbers, demand remains high and analysts expect that trend to continue into 2022.

“We expect a whirlwind 2022 for the housing market,” said Realtor.com chief economist Danielle Hale in an article for Forbes. “Home sales are expected to increase another 6.6% and home prices to rise another 2.9% on top of 2021 highs… Demand from [Millennial] households will keep the market competitive and fast-paced despite a small uptick in housing inventory as builders continue to ramp up production, increasing single-family starts by 5% in 2022.”