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Lenders Remain Bearish on Profit Margins

profit marginsTight inventory and rising home prices are impacting demand for mortgage and in turn affecting the outlook of mortgage lenders who reported a net negative outlook on profit margins for the seventh consecutive quarter, according to Fannie Mae’s quarterly Mortgage Lender Sentiment Survey released on Tuesday.

While the overall outlook of lenders on profit margins stayed negative, the Q2 2018 survey found that it was less negative than the first quarter of 2018. However, compared to the same period last year, the survey found that lenders had become more negative on their profit margin outlook as “competition from other lenders” remained the top driver for this view.

“Lenders remain bearish this quarter as they continue to face headwinds from rising mortgage rates, tight supply, and strong home price appreciation,” said Doug Duncan, SVP and Chief Economist at Fannie Mae. “These factors have combined to squeeze mortgage origination volumes and have increased competitive pressures.”

Apart from “competition from lenders,” market trend changes continued to be the other key reason cited by lenders for their lower profit margin outlook.

“Increased competitiveness will likely persist as a top driver of lenders’ mortgage business strategy,” Duncan said. “We expect this will prompt businesses to turn to cost-cutting as a means of managing their bottom lines, with payroll reduction likely to assume a more prominent role in future belt-tightening efforts.”

In terms of demand from consumers for GSE eligible and government loans, the survey found that the share of lenders reporting growth in these areas over the last three months and expectations of growth over the next three, dropped to the lowest reading for any second quarter period within the last three years.

The reporting and outlook on demand for refinancing mortgages didn’t fare any better with more lenders reporting declining refinance demand in the first quarter—the lowest level reported since the second quarter of 2014.

On the other hand, the net share of lenders reporting demand growth over the prior three months for non-GSE eligible loans hit a two-year high for the same quarter compared to last year.

According to the survey, the net share of lenders reporting the easing of credit standards over the prior three months as well as the net share of lenders reporting easing for the next three months remained stable. For non-GSE loans though, the net share reporting easing of credit standards ticked up from the first quarter, with the outlook on the net easing share for non-GSE eligible loans reaching a survey high.

About Author: Radhika Ojha

Radhika Ojha, Online Editor at the Five Star Institute, is a graduate of the University of Pune, India, where she received her B.A. in Commerce with a concentration in Accounting and Marketing and an M.A. in Mass Communication. Upon completion of her master’s degree, Ojha worked at a national English daily publication in India (The Indian Express) where she was a staff writer in the cultural and arts features section. Ojha also worked as Principal Correspondent at HT Media Ltd and at Honeywell as an executive in corporate communications. She and her husband currently reside in Dallas, Texas. You can contact her at Radhika.Ojha@theMReport.com.

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