Mortgage lenders have reported a net positive profit margin outlook for a third consecutive quarter, according to Fannie Mae’s third quarter 2016 Mortgage Lender Sentiment Survey®.
Conducted in August, the survey results show that 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. When asked what they expect to drive the increase, the top two reasons remain operational efficiency and technology, and consumer demand – the same two factors cited in every survey. 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 with 61 percent during the same period last year. This marks the first time in the survey’s history that government regulatory compliance is not the top reason for eroding profit outlook.
“For lenders, the most encouraging aspect of the survey is a significantly brighter profit outlook this year compared with last year,” says Doug Duncan, senior vice president and chief economist at Fannie Mae. “More lenders, on net, reported a positive profit outlook for the third straight quarter, the first time that has happened since the survey’s inception. Their perception of profit outlook in the third quarter of this year is in stark contrast to the third quarter of 2015, when a sizable net share of lenders expected a deteriorating profit outlook over the next three months. 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. 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.”
For purchase mortgages, the share of lenders reporting net demand growth over the prior three months is similar to this time last year (Q3 2015), across all loan types.
Net demand growth expectations for the next three months also remain near levels seen a year ago.
Upward Trend in Refinance Mortgage Demand over the Prior Three Months
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.
Moderate Easing of Credit Standards Reported over Prior Three Months, but Expectations for Next Three Months has Gradually Trended Down
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 (Q3 2015).
Lenders continue to report modest net easing expectations across all loan types for the next three months. However, the share of lenders reporting net easing has gradually ticked downward since Q4 2015.
More Overall Stability in Mortgage Execution Outlook
This quarter, more lenders reported expectations to grow GSE (Fannie Mae and Freddie Mac) shares and reduce portfolio retention shares.
Change in Direction for Mortgage Servicing Rights Execution Outlook
Reversing the trend seen so far this year, this quarter, more lenders reported expectations to decrease their share of MSR sold and increase the share of MSR retained.
Lenders Continue to Expect an Increase in Profit Margin over the Next Three Months
Lenders reported a net positive profit margin outlook for a third-straight quarter, and a significant increase from this time last year (Q3 2015).
The largest year-over-year increases in net profit margin outlook were seen among smaller institutions and credit unions (see survey Appendix for results by institution size and institution type).
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.
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