Outlook for Lender Profit Increased Significantly

The outlook for lender profit has increased significantly compared with this time last year, according to Fannie Mae’s Q3 2016 Mortgage Lender Sentiment Survey released Thursday.

Fannie Mae’s survey, conducted in August, found that 28 percent of mortgage lenders expect their respective firms to increase their profit margin in the next three months. Approximately 17 percent of respondents said they expect a decrease in profit margin over the next three months, while 55 percent said they expect no change.

Lenders who expect their profits to increase cited operational efficiency and technology, and consumer demand as the top reasons to drive the expected increase, according to Fannie Mae.

Notably, among lenders who expect a decrease in profits over the next three months, the cost of regulatory compliance was not the top reason for the eroding profit outlook for the first time in the history of the survey. The percentage of lenders who cited compliance costs as a an expected driver of declining profits fell from 61 percent in Q3 2015 down to 39 percent in Q3 2016, an all-time survey low.

Q3 marked the third straight quarter in which lenders reported a net positive profit margin outlook, and the largest year-over-year increases in net profit margin outlook were seen among credit unions and smaller institutions, which ironically, have been among the most vocal groups in the last few years expressing concerns over the costs of regulatory compliance.

“For lenders, the most encouraging aspect of the survey is a significantly brighter profit outlook this year compared with last year,” said Doug Duncan, SVP 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.”