Fannie Mae: Lender Profit Expectations More Positive as Compliance Cost Concerns Recede

Fannie Mae, Washington, D.C., said mortgage lenders reported a net positive profit margin outlook for a third consecutive quarter, with 28 percent of lenders said they expect their firm’s profit margin to increase over the next three months, compared with 17 percent who expect it to decrease and 55 percent who expect it to remain roughly the same.

The company’s third quarter Mortgage Lender Sentiment Survey, conducted in August, said operational efficiency and technology and consumer demand will likely drive the increases; however, among lenders who expect a decrease in their profit margin, the share citing government regulatory compliance as a driving factor declined significantly, reaching a survey-low 39 percent and compared to 61 percent during the same period last year.

“It appears that lenders have incurred the increased compliance costs from new regulations such as TRID, and are now on a stabilized though higher-cost footing to focus on growth strategies,” said Doug Duncan, senior vice president and chief economist with Fannie Mae. “However, any upward move in interest rates will bring reduced origination volumes and competitive pressure on profits. That pressure would likely result in lowered expectations and additional demands for cost containment.”

Last month, the Mortgage Bankers Association reported independent mortgage banks and mortgage subsidiaries of chartered banks reported a net gain of $1,686 on each loan they originated in the second quarter, up from $825 per loan in the first quarter.

The MBA Quarterly Mortgage Bankers Performance Report said average production volume rose to $654 million per company in the second quarter, up from $517 million per company in the first quarter. Volume by count per company averaged 2,721 loans in the second quarter, up from 2,196 loans in the first quarter.

Fannie Mae said for purchase mortgages, the share of lenders reporting net demand growth over the prior three months is similar to a year ago, across all loan types. Net demand growth expectations for the next three months also remain near levels seen a year ago.

For refinance mortgages, the share of lenders reporting net demand growth over the prior three months has gradually trended up this year across all loan types, reaching a survey high this quarter, likely driven by further mortgage rate decline after Brexit.

The report said lenders continue to report modest net easing of credit standards across all loan types for the prior three months. However, the share of lenders reporting net easing has gradually trended down, after reaching its survey high one year ago.

The report also noted for the third quarter, more lenders reported expectations to grow Fannie Mae and Freddie Mac shares and reduce portfolio retention shares. Reversing the trend seen so far this year, more lenders reported expectations to decrease their share of MSR sold and increase the share of MSR retained.

Similar to the MBA report, Fannie Mae said the largest year-over-year increases in net profit margin outlook were seen among smaller institutions and credit unions. Lenders expecting increased profit margins cite higher operational efficiency and rising consumer demand as the key reasons, while those reporting lower profit margin outlook point primarily to market competition and regulatory compliance.

The share of lenders citing government regulatory compliance as one of the top two reasons for their decreased profit margin outlook has reduced to 39 percent, from 67 percent last quarter and 61 percent the same quarter last year, reaching a survey low.