What Mortgage Lenders Can Expect From 2021 Profit Margins

The bottom line among mortgage lenders is not exactly sizzling lately. For the next three months, the outlook for profitability dipped from last quarter, according to Fannie Mae's Q4 2020 Mortgage Lender Sentiment Survey. In fact, a larger chunk of lenders now envisions profit margins receding even further.

According to the fourth-quarter survey, only 19% of lenders foresee a spike in profit margins compared to 48% in the prior quarter. Meantime, 33% believe profits will hold steady while 48% expect a dip in profits. These results come down to dwindling aggregate enthusiasm over the prior six quarters, a period during which lenders were increasingly optimistic over the prospects for profitability.

Across all types of loans in the fourth quarter, reported consumer demand maintained its traction and, in many cases, did not stray far from or hit survey highs. Reported purchase mortgage demand over the past three months set a new survey high for GSE-eligible loans and a new fourth-quarter survey high for government loans.

Of course, it seems COVID-19’s at least part of many stories, and this one’s no different as mortgage spreads compressed to pre-pandemic levels but remain above the long-term average.

After an April peak, there was a steady narrowing of mortgage spreads. As the 10-year Treasury picked up last month, the average primary mortgage spread (FRM 30 contract rate versus 10-year Treasury) came in at 190 basis points, returning to pre-pandemic levels.

"Consistent with key industry indicators, the fourth quarter MLSS results support the strength of the mortgage industry we’ve seen in 2020, despite the pandemic," said Fannie Mae Senior Vice President and Chief Economist Doug Duncan. "The net share of lenders reporting purchase demand growth for the past three months reached a new survey high for GSE-eligible loans. For refinance mortgages, although the net share of lenders reporting demand growth for the prior three months dipped slightly from last quarter's high across all loan types, it has remained at a historically high level. We currently expect loan origination volume to total $4.1 trillion in 2020, the highest on record since 2003."

In September, MReport provided insight on a Fannie Mae report, which showed that mortgage lenders had reason to rejoice this season in anticipation of a strong profit margin. The Fannie Mae report specifically highlights the findings gleaned from its Q3 2020 Mortgage Lender Sentiment Survey.

Survey data for this third quarter showed that nearly half of all lenders (48%) are optimistic about how they will fare this next three-month quarter. In fact, this percentage said they believe that their profits will increase even more than they did in Q3.

Among the survey respondents who were not as optimistic were the 37% who reported believing that their profits would stay steady and remain the same this coming quarter. And no survey would be complete without the full picture, which is rounded out by the 15% of lender respondents who admitted to being less than optimistic for this coming quarter, expecting profits to decrease versus increase.

The optimism driving the majority of those lenders expecting strong profits this quarter is based on the fact that consumer demand has stayed strong this past quarter across all loan types (i.e., GSE-eligible, non-GSE-eligible, and government). In fact, it has even reached record highs in many cases, bringing it back on par with this same time last year.