Profit margins will just worsen, lenders say
The profit margin outlook for lenders declined in the second quarter of 2021, the third quarter in a row of pessimism on the earnings front, according to Fannie MaeQuarterly Mortgage Lender Sentiment Survey.
According to the second quarter survey, 69% of lenders believe profit margins will decline over the next three months, up from 52% in the previous quarter. Only 19% think the profits will stay the same and 11% think the profits will increase. The drop represents the largest quarterly drop recorded since the survey began in 2014, Fannie Mae said this week.
Lenders have said they expect demand to buy mortgages, but demand will drop significantly on refis. The net share of lenders reporting negative demand growth over the next three months hit a net negative for the first time since the first quarter of 2019. In fact, it hit the lowest level since fourth quarter of 2018 for loans eligible for GSE and public loans. .
“Despite high optimism about the US economy, lenders are showing a cautious outlook for their mortgage business,” said Doug Duncan, chief economist for Fannie Mae. “Those who expected a lower profit margin continued to cite competition from other lenders and changes in market trends as the main reasons… With the shift from refinancing to buying, some lenders said transactions were purchases are more difficult to make and have lower margins.
Duncan noted that recent economic indicators are encouraging.
“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” , did he declare.
“Requests for purchase mortgages have declined slightly in recent weeks; however, they remain quite strong and above pre-pandemic levels, possibly due to still low mortgage rates, ”he said. “Our June National Housing Survey released earlier this week showed that consumer demand remains strong as “buying a home on the next move” is at an all time high, despite the challenges of accelerating home price appreciation and a insufficient supply. “
At Mortgage Bankers AssociationSpring virtual conference, speakers warned that shrinking profit margins could make conversations difficult between executives and loan officers.
“Trees don’t grow to the moon, and at some point the volume comes from refinances and the margin will tighten,” Michael McCauley, director of the mortgage advisory firm. Garrett, McAuley & Co., mentionned.
Lenders should prepare for a squeeze in margins “because it will likely be a lot worse” than in 2018, McAuley said. Except this time around, lenders in 2018 who aggressively priced loans “have a lot more retained earnings and a lot more resistance,” he said.