Mortgage lenders remain negative on profits, citing competition

Mortgage lenders were extremely bearish on their profitability outlook in the second quarter, issuing the largest negative net share differential in the seven-year history of Fannie Mae's Mortgage Lender Sentiment Survey.

Over two-thirds of the respondents, 69% said their profits will decrease over the next three months, while just 11% expected them to increase, for a negative net differential of 58%. Net share measures the difference between the percentage that believes profits will be higher and those that said they will be lower. That makes three consecutive quarters in which lenders were pessimistic about their profitability.

In the first quarter survey, 52% expected their profits to decrease for the next three months while just 15% expected an increase. But the second quarter 2020 survey found that 52% of respondents expected an increase in their business' profits while 23% expected them to drop.

"Those who expected a lower profit margin continued to cite competition from other lenders and market trend changes as the primary reasons," Fannie Mae chief economist Doug Duncan said in a press release. "Lenders reported a significant refinance demand decline over the past three months and expect the decline to continue, with their refinance demand growth expectations reaching the lowest level seen since the fourth quarter of 2018."

Some respondents said the profit outlook is negative because purchase loans are harder to complete and have lower margins.

There are indications of price war brewing. For example, United Wholesale Mortgage is running a promotion through June 20 offering to match the price that mortgage brokers receive from a group of 15 competitors.

Separately, Filo Mortgage of Fort Washington, Pa., said it will credit the customer $1,000 upon closing with Filo, if another lender is offering a more competitive price for the same product.

Competition from other lenders was cited by 68% of the respondents for their negative profit outlook, down from 78% in the first quarter, but still by far the top reason.

Market trend changes were listed by 44% of the respondents, up from 29% in the first quarter.

When it comes to demand for refinancings over the next three months, 55% of those surveyed expected lower demand for conforming mortgages, 49% for nonconforming and 54% for jumbo. Those forecasting their conforming refi demand would be higher made up a 12% share, while 16% expected higher nonconforming demand and 11% expected higher government loan demand

The outlook on purchase demand for the next three months was more positive. For conforming loans, 63% of the respondents expected increased demand in the next three months, while 56% forecast higher nonconforming loan demand and 55% expected the same for government purchase loans.

Only 8% thought conforming and government purchase mortgage demand would shrink and 5% said nonconforming demand would be lower.

"Purchase mortgage applications have trended slightly lower in recent weeks; however, they remain fairly strong, and higher than the pre-pandemic level, likely because of continued low mortgage rates," Duncan said. "Our June National Housing Survey released early this week showed that consumer demand remains strong since 'home purchase on next move' is at a survey high, despite the challenges of accelerated home price appreciation and insufficient supply."

Respondents were mostly neutral on whether credit standards were tightening, as opposed to the second quarter last year, when there was a significant bias towards tightening both for the prior three months and the three months going forward.

In the current survey, 11% felt that conforming standards were tighter in the three months prior and will be for the three months going forward, while 8 and 10% respectively felt they would be looser; the vast majority of the respondents were neutral on that question.

But in the second quarter 2020 survey, taken in the early stages of the pandemic, 55% felt credit standards tightened for conforming loans in the three months prior and 34% felt they would tighten further in the three months going forward. Only 3% said they loosened in the prior three months in that survey, while just 5% felt at that time they would loosen going forward.

For nonconforming mortgages, 20% felt standards will loosen in the next three months, while just 4% believe they will tighten. When it comes to government mortgages, 14% predict credit standards will loosen while just 5% said they will tighten.

There were 250 senior executives from 225 companies that completed the survey between May 4 and May 17.