Lenders Expect Refi to Pull Out to Cut Profits

Lenders don’t take the refinancing boom for granted. Fannie Mae’s second quarter mortgage lender sentiment survey found that most respondents do not expect business, and therefore profits, to stay at current levels. Sixty-nine percent said profit margins would decline over the next three months, 19% expect them to stay the same and 11% think they will increase. It was the third quarter in which pessimism prevailed, but only 52% of respondents to the first quarter survey expected a decline.

Lenders said they saw increased demand for purchase mortgages over the past three months while the demand for refinancing declined. The net share of lenders who reported increased demand turned negative for the first time since the first quarter of 2019 and was the lowest since the fourth quarter of 2018 for GSE-eligible loans and government loans.

Looking ahead, lenders expect demand for purchase mortgages to remain relatively strong, but these expectations were lower than in the previous quarter for GSE and government loans. Refinancing demand expectations have dropped dramatically for all types of loans.

“Despite high optimism about the US economy, lenders are showing a cautious outlook for their mortgage business,” said Doug Duncan, senior vice president and chief economist at Fannie Mae. This quarter, the largest net percentage of lenders in the survey’s seven-year history expects their profit margin outlook to decline. This is the third quarterly decline from record highs in profitability lenders in 2020. Those who expected a lower profit margin continued to cite competition from other lenders and changes in market trends as the main reasons. Lenders reported a significant drop in demand for refinancing in the past. over the past three months and expect the decline to continue as their expectations for refinancing demand growth hit the lowest level since moving from refinancing to buying, some lenders have reported that the transactions of purchase are more difficult and have lower margins. ”

“Recent economic indicators, however, paint a little more positive picture,” Duncan continued. “Although the gap between primary and secondary mortgages has continued to narrow, it remains wider than the level seen before the pandemic, suggesting lenders are still making profits, but not as much as in 2020. Mortgage applications edged down in 2020 over the past few weeks; however, they remain fairly strong and above pre-pandemic levels, likely due to persistently low mortgage rates. Our June National Housing Survey released at the start of the week showed that consumer demand remains strong since “buying a house on the next move” is at a high point in the survey, despite the challenges of accelerating home price appreciation and insufficient supply.

The net share of lenders reporting an easing of credit standards in the previous three months has gradually increased since the second quarter of 2020 for all types of loans. The net share of lenders planning easing over the next three months increased slightly from the previous quarter for loans not eligible for GSE, but remained relatively stable for loans eligible for GSE and government loans.

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