Shift dampens profit outlook of many firms
For the second consecutive quarter, the share of lenders expecting profit margins to decline has grown, according to a business sentiment survey released Thursday by Fannie Mae.
In the first quarter of 2021, more than half (52%) of mortgage lenders said they believe their margins will drop. In the previous quarter, the reading was 48%. Only 15% were positive that profits will increase.
“Despite continued strong expectations for purchase mortgage demand moving forward, many lenders are signaling caution about their profitability and market competitiveness,” said Fannie Mae chief economist Doug Duncan. “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.”
According to the Mortgage Bankers Association, applications for purchase loans jumped 7% this week. For refinances, Fannie reported that consumer demand fell over the past three months across all loan types. However, the net share of lenders predicting demand growth for refis grew slightly.
“Compounding their profit margin concerns, lenders also reported a slow pace of refinance demand,” Duncan said. “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.”
