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Mortgage Lenders Remain Pessimistic About Profits Despite Rising Mortgage Rates and Lower Volume
Rates are rising due to a lack of supply. Listed as one of the top reasons for lower purchase demand growth expectations
A majority of mortgage lenders expect near-term profitability to decline due to rising mortgage rates and decreased refinance activity (MLSS). According to the study, 75% of mortgage lenders anticipate profit margins would shrink in the next three months, up from 65% in the previous quarter, while 17% believe earnings will stay the same and 9% believe profits will rise. The primary reasons for the drop in profitability projections were competition from other lenders, market trend shifts, and consumer demand. In Q1 2022, mortgage lenders also became more pessimistic about the bigger economy, with 59 percent now believing the economy is on the wrong track, up from 29 percent in Q1 2021.
In comparison to last year, more lenders this quarter reported lower customer demand for both purchase and refinance mortgages during the preceding three months for all loan categories. Looking ahead, fewer lenders than last quarter expect purchase mortgage demand to increase in the next three months, while the clear majority of lenders expect refinance demand to fall.
Amid headwinds from declining refinance activity, slower purchase mortgage demand growth, and narrowing spreads, mortgage lenders expressed bearishness about near-term profit margin expectations for the sixth consecutive quarter. Rising interest rates, a dearth of availability, and robust home price appreciation have slowed refinance activity and tightened home purchase affordability for customers, lowering lenders’ prospects for future business activity. Numerous uncertainties, such as rising inflation and the Fed’s monetary policy response, which must now account for the inflationary impact of Russia’s war in Ukraine, signal increased market volatility, but the overall upward rate trend is consistent with lenders’ expectations.
The primary-secondary mortgage spread is still high.
In Q3 2021, the primary-secondary mortgage spread was 127 basis points, up 9 basis points from the 2019 average but down from a high of 174 basis points in Q3 2020.
Purchase mortgage demand is likely to stay relatively constant, but refinance demand is expected to fall.
Demand for buy mortgages grew at a slower pace in the previous three months, continuing a decreasing trend. Across all loan types, the net share of lenders reporting demand increase during the previous three months fell to the lowest level in any first quarter in the last two years. The net share of lenders predicting demand growth in the next three months increased significantly from the previous quarter across all loan types, although it remained the lowest figure for any first quarter in survey history.
The net share of lenders reporting demand growth in the previous three months, as well as the net share expecting demand growth in the next three months, remained similar to the previous quarter, but overall continued its downward trend across all loan types, reaching the lowest levels in three years (since Q1 2019). In the case of government loans, the net share of respondents anticipating increased demand in the following three months fell to a new poll low (since survey inception in Q1 2014).
Lenders anticipate little change in credit criteria.
Over the past four quarters, the net proportion of lenders reporting softening credit criteria in the previous three months, as well as the net share expecting easing in the next three months, has stayed relatively flat.
Homebuying and home-selling conditions continue to be considerably disparate, according to consumers.
Fannie Mae surveys customers monthly as part of its National Housing Survey from which the Home Purchase Sentiment Index is created, in collaboration with PSB. Consumers’ perceptions of homebuying and home-selling conditions remained substantially disparate in February. Only 29% of consumers say now is a “good time to buy” a property, while 72% believe now is a “good time to sell.” In addition, more customers expect mortgage rates and housing prices to climb in the coming year.
The Mortgage Lender Sentiment Survey by Fannie Mae
Fannie Mae’s Mortgage Lender Sentiment Survey surveys senior executives of its lending institution clients on a quarterly basis to gauge their perspectives and prognosis on several aspects of the mortgage industry. PSB performed the Fannie Mae first quarter 2022 Mortgage Lender Sentiment Survey in collaboration with Fannie Mae between February 1, 2022 and February 14, 2022. Contact Hoard Law with any advice or questions.