Lenders' Profit Outlook Dips as Mortgage Rates Rise and Competition Heats Up

Rhea-AI Summary

The Q1 2021 Mortgage Lender Sentiment Survey by Fannie Mae shows an increasing pessimism among mortgage lenders regarding profit margins, with 52% expecting declines—up from 48% in Q4 2020. Purchase mortgage demand expectations have risen across all loan types, despite a mixed Q1 performance. The report highlights a decrease in refinance demand and rising mortgage rates due to a surge in the 10-year Treasury yield. Competition among lenders remains a significant concern, alongside anticipated declines in profitability due to market shifts.

Positive

• Purchase mortgage demand expectations rose significantly across all loan types.
• GSE-eligible loans reached the highest demand level for a first quarter since Q1 2014.

Negative

• 52% of lenders expect profit margins to decrease, rising from 48% last quarter.
• Refinance mortgage demand has dropped significantly, reaching the lowest level since Q2 2019.
• Upward pressure on mortgage rates due to rising Treasury yields could dampen home sales.

WASHINGTON, March 11, 2021 /PRNewswire/ -- The share of mortgage lenders expecting profit margins to decline in the months ahead increased for the second consecutive quarter, with an even greater share of lenders now expecting profit margins to decrease in the months ahead, according to Fannie Mae's (OTCQB: FNMA) Q1 2021 Mortgage Lender Sentiment Survey^® (MLSS). According to the first quarter survey, 52% of lenders believe profit margins will decrease compared to 48% in the prior quarter, while 33% believe profits will remain the same and 15% believe profits will increase.

Reported consumer demand in the first quarter was generally mixed compared to the prior quarter, depending on the loan type and timeframe. Reported purchase mortgage demand over the past three months fell for GSE-eligible and government loans but remained flat for non-GSE eligible loans. However, looking ahead to the next three months, purchase mortgage demand expectations rose substantially across all loan types compared to the prior quarter. For refinances, compared to the fourth quarter, most lenders reported that consumer demand fell over the previous three months across all loan types, but they reported slight growth expectations for the next three months.

"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. Those who expected a lower profit margin cited competition from other lenders as the primary reason, reaching a survey high last seen in Q1 and Q2 of 2018, while a market shift from refinance to purchase was cited as the next biggest reason for the first time since Q4 2019."

"Compounding their profit margin concerns, lenders also reported a slow pace of refinance demand," continued Duncan. "With a modestly higher interest rate forecast, we expect refinance activity to gradually wane. The recent rise in the 10-year Treasury yield is putting some upward pressure on mortgage rates. 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."

Survey Highlights and Other Notes

Read the Q1 2021 MLSS summary research report for additional information and analysis.

Mortgage spreads continue to compress to 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. The 30-year fixed contract rate broke 3.0% in early March for the first time since last July and we expect mortgage rates to continue a modest climb in the coming months.

Consumer demand remains strong for purchase mortgages but weakens among refinance mortgages

For purchase mortgages, the net share of lenders reporting demand growth over the past three months fell from last quarter for GSE-eligible and government loans; however, for GSE-eligible loans, it reached the highest reading for any first quarter in the survey's history (since Q1 2014). Looking ahead, demand expectations over the next three months rose significantly across all loan types from last quarter and remained similar to the levels seen in Q1 2020.

For refinance mortgages, the net share of lenders reporting demand growth over the prior three months decreased significantly across all loan types from last quarter, reaching the lowest level seen since Q2 2019. Refinance demand growth expectations on net for the next three months ticked up across loan types from the prior quarter (Q4 2020), but remained lower than the peak quarters seen in 2020.

Credit standards remain relatively stable

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 in Q2 2020, to a generally neutral stance. For the next three months, the net share of lenders expecting easing has remained flat since recovering from the dip seen in Q2 2020, returning to the pre-COVID-19 level.

Consumer Confidence in Housing Fell Slightly in February

In coordination with PSB, Fannie Mae also surveys consumers monthly as part of its National Housing Survey^®, of which the Home Purchase Sentiment Index^® is derived. In February, a plurality of consumers continued to indicate the belief that it's a good time to buy and sell a home, although both measures have trended downward of late. Consumers also indicated greater confidence in job security, a possible reflection of job-related optimism associated with vaccine mobilization, the expected easing of lockdown restrictions, and upcoming warmer weather.

About Fannie Mae's Mortgage Lender Sentiment Survey
The Mortgage Lender Sentiment Survey by Fannie Mae polls senior executives of its lending institution customers on a quarterly basis to assess their views and outlook across varied dimensions of the mortgage market. The Fannie Mae first quarter 2021 Mortgage Lender Sentiment Survey was conducted between February 2, 2021 and February 15, 2021 by PSB in coordination with Fannie Mae. For detailed findings from the first quarter 2021 survey, as well as survey questionnaires and other supporting documents, please visit the Fannie Mae Mortgage Lender Sentiment Survey page on fanniemae.com. Also available on the site are special topic analyses, which focus on findings and analyses of important industry topics.

About Fannie Mae
Fannie Mae helps make the 30-year fixed-rate mortgage and affordable rental housing possible for millions of people in America. We partner with lenders to create housing opportunities for families across the country. We are driving positive changes in housing finance to make the home buying process easier, while reducing costs and risk. To learn more, visit:
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Opinions, analyses, estimates, forecasts, and other views of Fannie Mae's Economic & Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR Group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the ESR Group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.

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SOURCE Fannie Mae

FAQ

What were the findings of Fannie Mae's Q1 2021 Mortgage Lender Sentiment Survey for FNMA?

The Q1 2021 survey found that 52% of lenders expect profit margins to decline, with significant concerns about competition and rising mortgage rates.

How did purchase mortgage demand change in Q1 2021 according to FNMA?

Purchase mortgage demand expectations increased across all loan types, despite a mixed reporting for the past three months.

What is the outlook for refinance mortgages as reported by FNMA in Q1 2021?

Refinance mortgage demand grew slightly in expectations for the next three months, but overall demand has decreased significantly compared to prior quarters.

What is affecting profit margins for lenders according to the FNMA report?

Lenders cited increased competition and a market shift from refinance to purchase mortgages as primary reasons for their declining profit margin outlook.