Record share of lenders expect shrinking profits in 2021: Fannie Mae

After a booming 2020, a growing share of mortgage lenders expect lower profits in the coming months as climbing interest rates set up heightened competition.

In the first quarter, 52% of industry executives predicted their upcoming margins will shrink, compared to 48% the quarter before and just 4% a year earlier, according to Fannie Mae’s Mortgage Lender Sentiment Survey.

Contrarily, 15% of respondents thought profit margins will increase, down quarterly from 19% and 51% annually. The remaining 33% believed profits will remain about where they are today.

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As a result the net share for lenders’ margin sentiment fell for the second quarter in a row to -37%. It set a record low point for the survey, beating out the fourth quarter of 2018’s -34%. The two quarter negative streak came after riding high throughout the preceding three quarters. Lender competition was the most cited reason for the expectations of declining margins, followed by the shift to a more purchase-heavy market.

“With a modestly higher interest rate forecast, we expect refinance activity to gradually wane,” Fannie Mae Chief Economist Doug Duncan said in the report. “The recent rise in the 10-year Treasury yield is putting some upward pressure on mortgage rates. Some lenders commented that for now they are willing to absorb some of these costs to maintain volume.” This indicates that they are willing to price loans below what would be expected.

A 65% net share of lenders forecast purchase demand to rise while only a net 15% said the same for refinancing. These respectively compare to 29% and -3% from last quarter, and 75% and 63% from last year.

“In the longer term, continued upward pressures on interest rates would likely dampen home sales and mortgage originations as lenders raise mortgage rates,” Duncan continued. “This might push lenders to reduce their production capabilities.”

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Originations Mortgage rates forecast Earnings Fannie Mae
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