The continued high volume of refinancing
kept mortgage lenders’ outlook for profits relatively high during the second
quarter, although it was down slightly from the first quarter of the year.
Fannie Mae’s Mortgage Lender Sentiment survey found that more than half (52 percent)
of lenders who responded believed that their profit margins would be higher
than the prior quarter, while the remainder were almost equally divided between
those who expected lower profits or that they would remain unchanged. The
survey of senior mortgage executives was conducted between May 5, 2020 and May
The lender optimism was based largely on
the demand for refinancing, which outweighed a perceived decline in mortgage demand.
The net share of lenders reporting demand growth for refis over the prior three
months remained strong for all loans types (GSE-eligible, non-GSE-eligible, and
government) and reached a survey high for GSE-eligible loans. Demand growth
expectations on net for the next three months fell from last quarter but
remained high across all loan types.
For purchase mortgages, the net share of
lenders reporting demand growth for both the prior three months and the next
three months fell significantly from last quarter across all loan types. For
non-GSE-eligible mortgages, the net share reporting demand growth for both the
prior three months and the next three months reached survey lows.
The second most frequently cited reason lenders cited for the optimistic profit
expectations was the pricing and policies
of the GSEs Fannie Mae and Freddie Mac. Fannie Mae said mortgage spreads remain
elevated; the average primary mortgage spreads (FRM 30 contract rate versus
10-year Treasury) came in at 256 basis points in May, above the long-run
average of 168 basis points.
However, for the
first time in the survey’s history, more lenders responded that they believe
the U.S. economy is on the wrong track, rather than on the right track. Also, after
years of remaining largely unchanged, this quarter the majority of lenders
reported tightening credit standards across all loan types.
“This quarter’s results reflect the impact of COVID-19 on all fronts,”
said Fannie Mae Senior Vice President and Chief Economist Doug Duncan.
“Lenders’ reported purchase mortgage demand for the prior three months and
expectations for the next three months declined significantly from last quarter
across all loan types. Demand for non-GSE eligible loans showed a sharper drop,
reaching the lowest reading since survey inception, indicating a shift toward
the GSE-eligible lending market. Lenders attributed the purchase mortgage demand
decline to COVID-19-related factors, including home price uncertainty, higher
unemployment, policy changes, and lower inventory. Lenders pointed to the same
reasons for credit tightening.”
“There are, however, encouraging signs,” continued Duncan. “For the agency
lending market, the purchase demand outlook remains positive on net and is well
above the Q4 2018 reading, a period of accelerated declines. If borrowers
perceive the bottom of the economic downturn as having passed, there could be a
pickup in purchase demand to take advantage of continued low mortgage rates.
Additionally, this quarter, refinance demand expectations held relatively
stable, demonstrating continued strength. Lenders’ profitability outlook
remains positive, likely because of stable refinance demand, lender capacity
constraints, and still-wide mortgage spreads. Nevertheless, challenges remain
as the uncertainty around COVID-19 persists, in particular for mortgage