Mortgage lender outlook posts record high in Q1

The profit-margin outlook for mortgage lenders hit a new survey high as strong consumer demand for mortgages continued to drive lenders' expectations of increased profitability.

Fifty-one percent of lenders believe profit margins will rise this quarter compared to the previous quarter, according to the Fannie Mae Mortgage Lender Sentiment Survey. Meanwhile, 44% think that profits will remain the same, and only 4% anticipate they will decrease.

Demand for both purchase and refinance mortgages continued to spur lenders' increased profitability outlook. Lenders cited operational efficiency as the second most common reason for the positive view.

"Lenders' expectations of consumer demand for purchase and refinance mortgages hit survey highs this quarter, with many lenders pointing to favorable interest rates as the engine driving the demand," said Doug Duncan, senior vice president and chief economist of Fannie Mae. "The first quarter survey data, which were collected during the first two weeks of February, do not reflect the potential impact of the decline in the 10-year Treasury rate seen in recent weeks. Mortgage spreads have since widened. Given capacity constraints and continued interest rate volatility, we expect mortgage rates to continue to decline and spreads to continue to be wider throughout 2020."

Highlights of the Mortgage Lender Sentiment Survey

• Mortgage spreads widened significantly in Q1 2020, consistent with mortgage lenders' optimistic outlook on profitability. In February, the primary mortgage spread (30-year FRM versus 10-year Treasury) averaged at 216 basis points, well above the long-run average of 168 basis points
• For purchase mortgages, the net share of lenders reporting demand growth over the last three months posted the highest readings for any first quarter in the survey's history and since Q1 2015 for non-GSE-eligible loans
• For refinances, the net share of lenders reporting demand growth over the last three months inched down from the prior quarter's survey highs but remained very strong. Meanwhile, demand growth expectations on net for the next three months for GSE-eligible and government loans hit new survey highs
• The pace of credit easing remained unchanged, with most lenders reporting no major changes in their underwriting credit standards for the past three months and expected no significant changes for the next three months

"Past experience from 2012 and 2016 suggests that mortgage spreads generally take a few months to compress," Duncan said. "We anticipate similar rate dynamics this time, depending on the path of the underlying Treasury rate. Although uncertainty around coronavirus may have a dampening effect on housing market sentiment, for now, we expect the continued low-interest-rate environment will help bolster mortgage volume, particularly refinances, as well as lender profitability, consistent with lenders' expectations."