Lenders Remain Pessimistic about Demand, Profits

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Last week the Mortgage Bankers Association said that
independent mortgage bankers had reported negative production revenue in the
first quarter of this year. This week Fannie Mae reminded us that lenders have long
expected it to happen.   

The company’s Mortgage Lender Sentiment Survey for the
second quarter, which gathered responses from 87 senior executives representing 170 lending institutions, found
more than a third (35 percent) expect their net profit margin to decline over
the next quarter while 47 percent expect it will stay the same.  Over the last four quarters less than 20
percent of respondents have expected profits to improve.

Fannie Mae
said it was the seventh consecutive quarter that the lender profit outlook has
been negative, although responses to the second quarter survey were less
downbeat than in the first quarter when nearly half of the lenders expected a
decrease.  Expectations were substantially
more negative
that in the same quarter last year when nearly a quarter of
lenders were looking for higher margins.

 

 

Respondents
cited competition from other lenders as the primary reason for their lower
expectations.  It was the sixth
consecutive quarter for that sentiment to take first place and it tied with the
first quarter as the survey high with a net of 78 percent. The second key
reason given was “market trend changes” but it trailed at 31 percent. Among the
few lenders who expect profits to increase, the most frequent justification was
technological improvements.

Competition
will probably continue to be seen as a top factor as expectations for mortgage
demand decline.  The net share of lenders
reporting they experienced growth in demand for purchase mortgages over the
previous three months as well as the net share who expect growth over the next
three months were both at the lowest level for any second quarter over the past
three years.  However, the net an
increase in demand for non-GSE eligible loans over the previous period at 44
percent was the highest for a second quarter since 2015.  

 

 

For refinance mortgages, on net,
more lenders continued reporting declining demand over the prior three months, with
responses for all three loan types a net negative, ranging from -67 percent for
non-GSE eligible loans to -73 percent for both government and GSE eligible
loans.  The forward-looking responses
were a little less gloomy, net positive responses about upcoming demand ranged
from -46 to -54 percent.  Both sets were
the lowest since the second quarter of 2014.

“Lenders remain bearish this
quarter as they continue to face headwinds from rising mortgage rates, tight
supply, and strong home price appreciation, which have drastically reduced
refinance activity and restrained home purchase affordability,” said Doug
Duncan, senior vice president and chief economist at Fannie Mae. “These
factors have combined to squeeze mortgage origination volumes and have
increased competitive pressures. Increased competitiveness will likely persist
as a top driver of lenders’ mortgage business strategy. We expect this will prompt
businesses to turn to cost-cutting as a means of managing their bottom lines,
with payroll reduction likely to assume a more prominent role in future
belt-tightening efforts.”

The net share of lenders reporting
easing of credit standards over the prior three months as well as the net share
of lenders reporting easing for the next three months remained stable overall. However,
the net share reporting easing of credit standards for non-GSE eligible loans
appeared to tick up from last quarter. In particular, the net easing share for
non-GSE eligible loans for the next three months reached a survey high.

 

 

Of the 170
institutions represented in the second quarter survey, 67 were depository
institutions, 56 were mortgage banks, and 30 as credit unions.  More than half, 94 institutions, were among
the bottom 65 percent of Fannie Mae lenders classified as small institutions,
with loan origination volume of less than $400 million.  Thirty-six were mid-sized, with volumes
between $400 million and $1.18 billion. 
The remaining 40 represent the top 15 percent of lenders, those with
loan volumes over $118 billion.

The second
quarter Mortgage Lender Sentiment Survey was conducted between May 2 and May
14, 2018.



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