What does the squeeze mean for lenders?
Mortgage lenders’ profitability outlook continued to weaken in the fourth quarter after last year’s run-up, data from Fannie Mae’s latest survey revealed.
Up for the fifth straight quarter, the percentage of lenders who believe profit margins will drop in the next three months increased from 46% in the third quarter to 65% in the fourth quarter. Nearly a third (31%) expect profits to stay the same, and only 3% were positive that profits would improve.
Tight competition and shifting market trends remain the top reasons lenders cited in the survey.
“This quarter’s MLSS results suggest that the housing market may be poised to return to a more ‘normal’ state in the new year, following the boom experienced over the past two years due to historically low mortgage rates and pandemic-related changes in homebuyer behavior,” said Fannie Mae chief economist Doug Duncan.
Despite the margin squeeze, Duncan highlighted two factors indicating that lender profitability may remain stable in the months ahead.
“Net loan production income levels, as reported by the Mortgage Bankers Association, and the width of the current primary-secondary spread (an indicator of potential profitability) allow us to level-set,” he said. “With both still slightly above pre-pandemic levels, we expect lenders to continue investing in capacity efficiency and process streamlining to maintain profitability despite the thinner-margin environment.”
The primary-secondary mortgage spread, correlated with loan production income, averaged 127 basis points in Q3. That’s 13bps above the 2019 average, but down from the record high 174bps seen in Q3 2020. Net loan production income has moved similarly, according to Fannie Mae. It now sits well below the Q3 2020 peak, though it did increase in Q3 2021 and remains well above the 2019 average.
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Lender sentiment for purchase mortgage demand stayed neutral for the next quarter, with lenders equally split between upward and downward consumer demand expectations. For refinances, the net share of lenders who expect demand to grow reached a three-year low in Q4.
