Mortgage lenders are predicting the market will return to some semblance of normal in 2022, at least that’s according to Fannie Mae’s [1] Mortgage Lender Sentiment Survey [2], which is a quarterly poll of senior lending executives to assess their views and outlook across the mortgage market.
Among the 205 lenders surveyed, 65% predicted that their profit margins would decrease during the next quarter, up from 46% in the second quarter, while 31% predicted their profits will remain the same, and 3% predicted their profit margins would increase. “Competition from other lenders” was the chief reason cited as to why they believe profit margins would be lower next quarter; they also cited market trend changes and consumer demand as other mitigating factors.
Overall, lenders also reported reduced consumer demand than seen in the previous three months, but they expect purchase demand to remain stable while refinance demand is expected to taper off significantly.
"This quarter's MLSS results suggest that the housing market may be poised to return to a more 'normal' state in the new year, following the boom experienced over the past two years due to historically low mortgage rates and pandemic-related changes in homebuyer behavior," said Fannie Mae Senior Vice President and Chief Economist Doug Duncan [3]. "Mortgage lenders' profitability outlook has significantly weakened over the past several quarters from its early pandemic run-up. However, net loan production income levels, as reported by the Mortgage Bankers Association, and the width of the current primary-secondary spread (an indicator of potential profitability) allow us to level-set. With both still slightly above pre-pandemic levels, we expect lenders to continue investing in capacity efficiency and process streamlining to maintain profitability despite the thinner-margin environment."
Other high-level takeaways found by the report include:
Primary-secondary mortgage spread and loan production income remain elevated
“The primary-secondary mortgage spread, which is correlated with loan production income, averaged 127 basis points in Q3 2021, 13 basis points above the 2019 average, though down from the peak of 174 basis points seen in Q3 2020,” the report said. “Net loan production income has moved similarly, now sitting well below the peak seen in Q3 2020, though it did rise in Q3 2021 and remains well above the 2019 average.”
Consumer demand expected to remain stable for purchase mortgages but decline significantly for refinances
“For purchase mortgages, although the net share of lenders reporting demand growth over the prior three months, as well as for the next three months, reached the lowest readings for any fourth quarter over the past two years, the direction on net stayed positive for the past three months, with more lenders reporting that demand went up. It stayed neutral for the next three months with lenders equally split between upward and downward demand expectations.”
“For refinance mortgages, the net share of lenders reporting refinance demand growth over the prior three months, as well as the net share expecting demand growth for the next three months, decreased significantly from last quarter and last year across all loan types, reaching the lowest readings in three years (since Q4 2018).”
Lenders expect credit standards to remain largely unchanged
“The net share of lenders reporting easing credit standards over the prior three months, as well as the net share expecting easing over the next three months, remained generally flat across the past four quarters.”
Economic pessimism among consumers hits 10-year high but sentiment toward housing remains flat
“In coordination with PSB, Fannie Mae also surveys consumers monthly as part of its National Housing Survey, of which the Home Purchase Sentiment Index® is derived. In November, while the overall index remained flat, consumers' differ widely on their views of homebuying and home-selling conditions. Only 29% of consumers reported that it was "a good time to buy" a home, while 74% believe it's a ‘good time to sell.’ Pessimism toward the overall economy also reached a 10-year high, with 70% of consumers reporting that the economy is on the ‘wrong track’.”