Lenders see an upcoming decline in loan demand and profitability

Mortgage lenders are pragmatic about their business outlook over the next quarter, expecting mortgage rates to continue to rise and refinancing activity to decline accordingly. Fannie Mae’s first quarter Mortgage Lender Sentiment Survey (MLSS) found that 75% of responding lenders expect profit margins to decline over the next three months, an increase of 10 points compared to the fourth quarter 2021 survey. Seventeen percent expect no change in profitability while 9 percent seek growth. It was the sixth consecutive quarter where the earnings outlook was negative, and the net positive result of -66% was the lowest in the survey’s eight-year history.

Lenders cited competition, changes in market trends and in consumer demand as the main reasons for predicting lower profits. They were also more pessimistic about the overall economy. Fifty-nine percent said it was on the wrong track, up from 29% a year earlier.

On the demand side, lenders were in strong agreement that refinance demand would decline over the next three months and those reporting growth in demand over the previous three months continued a trend. down for all three loan types (government, GSE-eligible, and non-GSE-eligible), reaching the lowest share in each case for more than two years. The government refinancing growth forecast was the weakest of any quarter in the survey’s history.

A similar trend emerged for demand for purchase mortgages. The net share of lenders reporting growth in the previous three months hit the lowest figure for any first quarter in the past two years for any type of loan. Over the next three months, the net share of lenders expecting demand growth increased significantly from last quarter across all loan types, but still posted the lowest figure of any first quarter. of the history of the investigation.

“For the sixth consecutive quarter, mortgage lenders expressed pessimism about near-term profit margin expectations amid headwinds from lower refinancing activity, slower growth in mortgage demand from buying and narrowing spreads,” said Doug Duncan, senior vice president and chief economist at Fannie Mae. “For consumers, rising interest rates, lack of supply and sharp appreciation in home prices have reduced refinancing activity and further limited the affordability of buying a home, which , of course, dampens lenders’ expectations of future business activity Many uncertainties, including increased inflation and the Fed’s monetary policy response, which must now also take into account the inflationary impact of Russia’s war on Ukraine, suggests increased market volatility, but the general underlying trend of higher rates is in line with lenders’ expectations.

The share of lenders reporting an easing in lending standards in the prior quarter as well as those expecting this to happen in the near term remained largely unchanged, with a positive single-digit net result in almost all cases.

Fannie Mae’s MLSS is conducted quarterly with senior executives of its lending clients. The most recent survey drew 188 responses, including 83 mortgage banks, 62 depository institutions and 40 credit unions.

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