Fannie Mae’s Q3 2019 Mortgage Lender Sentiment Survey reports that the net profit margin outlook for mortgage lenders hit a new high, due to strong mortgage demand expectations, especially in refinancing.
"Lender profitability sentiment hit a survey high this quarter, despite the movement of credit standards from net easing to net tightening," said Fannie Mae SVP and Chief Economist Doug Duncan. "Lenders attributed their upbeat profitability outlook to consumer demand and operational efficiency. Many lenders pointed to declining interest rates as the engine behind consumer demand, particularly for refinance mortgages. Together, the results suggest that lenders’ positive profitability outlook is being driven primarily by business fundamentals, not by lowered credit standards."
According to the survey, the volume of lenders who anticipate profit margins being positive rose from 29% in Q2 2019 to 40% in Q3 2019. The index had been in the negative from Q4 2016 to Q1 2019, dipping as low as -34% in Q4 2018. The index was 11% in Q3 2016.
Fannie Mae states that the recent widening of the primary/secondary mortgage spread appears to confirm lenders’ profitability.
“Mortgage rates typically do not fully absorb a contemporaneous decline in Treasury rates, due in part to temporary capacity constraints and increased hedging costs for lenders. A wider spread contributes to lender revenues and profits,” the release states.
On the refinance side, across all loan types the volume of lenders reporting growth over the prior three months and the next three months continued its upward trend that began in Q1 2019. Fannie Mae reports that around 40% of outstanding mortgages—approximately $4.1 trillion—would benefit from refinancing. Fannie Mae expects the share of refinancing originations to grow through the remainder of the year.
Previously, Fannie Mae reported in its Home Purchase Sentiment Index (HPSI) that a mortgage environment likely to decline brought an increase to the HPSI of 0.1 points.
This, despite five of the six HPSI components remaining flat. The only component that saw a considerable spike during the month was the "Mortgage Rates will go Down" factor that rose 11 percentage points to drive the overall index higher, the report indicated.