Fannie Mae: Mortgage Lenders’ Profit Margin Outlook Turns Positive on Surge in Consumer Demand

Fannie Mae, Washington, D.C., said the net profit margin outlook for mortgage lenders turned positive for the first time in nearly three years, due primarily to strong demand expectations for both purchase and refinance mortgages.

The company’s Q2 2019 Mortgage Lender Sentiment Survey reported for purchase mortgages, the net share of lenders reporting demand growth over the prior three months rose significantly from the survey lows of last quarter, reaching the highest reading for any second quarter since 2016 for GSE-eligible and government loans and since Q2 2015 for non-GSE-eligible loans. Demand growth expectations for the next three months also improved, with the net share of lenders reporting growth expectations reaching the highest level for any second quarter over the past three years for GSE-eligible loans and over the survey’s history for non-GSE-eligible loans.

For refinance mortgages, across all loan types (GSE-eligible, non-GSE-eligible and government), Fannie Mae said the net share of lenders reporting demand growth over the prior three months turned positive after being negative for nine consecutive quarters, reaching the highest reading since Q4 2016. Similarly, the net share expecting demand growth expectations for the next three months continued to climb and is now positive for the first time since Q3 2016 for GSE-eligible loans and since Q1 2016 for non-GSE-eligible and government loans.

“Lenders are signaling strong demand-driven mortgage market dynamics, with optimism for both their consumer demand and profitability outlooks reaching multi-year highs,” said Doug Duncan, Senior Vice President and Chief Economist with Fannie Mae. “Lender sentiment regarding both recent and expected purchase mortgage demand growth across all loan types was the most upbeat in at least three years. And for the first time in more than two years, lenders who are reporting or expecting growing refinance demand became the majority.”

Duncan said with brighter volume expectations, the profit margin outlook improved markedly, helping the net share of lenders reporting rising profits turn positive for the first time in nearly three years, with consumer demand cited as the top reason for the rosier outlook. “A lift in lender sentiment from depressed levels is an encouraging sign; however, many challenges remain, including the continued shortage of entry-level housing. In addition, it appears that the meaningful easing of lending standards is a thing of the past,” he said.

Fannie Mae said overall, the pace of easing has trended down. Specifically, for GSE-eligible and government loans, the net easing share has declined to the lowest levels since 2014.

Additionally, Fannie Mae said lenders’ net profit margin outlook turned positive for the first time since Q3 2016. It reached the second most positive reading in survey history (since Q1 2014).

Earlier this month the Mortgage Bankers Association reported independent mortgage banks and mortgage subsidiaries of chartered banks reported a net gain of $285 on each loan they originated in the first quarter, up from a reported loss of $200 per loan in the fourth quarter.

The MBA Quarterly Mortgage Bankers Performance Report said average pre-tax production profit rose to seven basis points in the first quarter, up from an average net production loss of 11 bps in the fourth quarter and 15 bps from a year ago.