Mortgage lenders continue to lower expectations amid market and economic volatilities
More lenders are feeling the pinch from rising mortgage rates and dwindling consumer demand following the pandemic-era refinance boom.
The share of mortgage lenders that expect profit margins to decrease in the next quarter increased to 75% in the first quarter from 65% in the previous quarter, according to Fannie Mae’s latest survey. Only 9% hope that profits will increase, while 17% believe profits will stay the same.
Competition, market shifts, and consumer demand remained the top reasons lenders cited for the bearish profitability outlook. Across all loan types, more lenders reported reduced demand for both purchase and refinance mortgages over the past three months compared to the same period a year ago. Looking ahead, fewer lenders anticipate purchase mortgage demand to grow in the next quarter, while the majority said refinance demand will continue to decrease.
“For the sixth consecutive quarter, mortgage lenders expressed bearishness about near-term profit margin expectations amid headwinds from declining refinance activity, slower purchase mortgage demand growth, and narrowing spreads,” Fannie Mae chief economist Doug Duncan said. “For consumers, rising interest rates, lack of supply, and strong home price appreciation have reduced refinance activity and further constrained home purchase affordability, which, of course, is dampening lenders’ expectations of future business activity.”
Read more: What is the impact of the Fed rate hike on home purchase sentiment?
According to Fannie’s report, the average primary-secondary mortgage spread in Q3 2021 was 127 basis points, up by nine basis points from 2019, though down from the 174bps peak seen in Q3 2020.
Mortgage lenders also grew more pessimistic about the larger economy during the quarter, with 59% now reporting that the economy is on the wrong track, compared to 29% in Q1 2021.
“Numerous uncertainties, including heightened inflation and the Fed’s monetary policy reaction, which must now also account for the inflationary impact of Russia’s war on Ukraine, suggest increased market volatility, but the general underlying, upward rate trend aligns with lenders’ expectations,” Duncan said.
