Mortgage Lenders Profit Margin Outlook Hits Survey High on Surging Refinance Demand

Reported Refinance Mortgage Demand Expectations Up as Interest Rates Move Lower

Matthew Classick

202-752-3662

WASHINGTON, DC – The net profit margin outlook for mortgage lenders hit a survey high, due primarily to strong mortgage demand expectations, particularly in the refinance space, according to Fannie Mae's Q3 2019 Mortgage Lender Sentiment Survey^®.

"Lender profitability sentiment hit a survey high this quarter, despite the movement of credit standards from net easing to net tightening," said Fannie Mae Senior Vice President 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."

MORTGAGE LENDER SENTIMENT SURVEY HIGHLIGHTS:

Mortgage Spreads Point to Continued Positive Profitability Outlook

The recent widening of the primary/secondary mortgage spread appears to confirm mortgage lenders' reported 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.

Refinance Mortgage Opportunity

For refinance mortgages, across all loan types (GSE-eligible, non-GSE-eligible, and government), the net share of lenders reporting demand growth over the prior three months and next three months continued the upward trend that began in Q1 2019 and which has now reached new survey highs. We currently estimate that approximately 40 percent of outstanding mortgages, or about $4.1 trillion of unpaid principal balance, would likely experience a benefit from refinancing, and we expect the share of refinance originations to grow through the remainder of the year.

Net Tightening for GSE-Eligible and Government Loans

Lenders indicated that credit standards moved to net tightening for GSE-eligible and government loans, with the share of lenders reporting tightening higher than the share reporting easing.

A Mix of Easing and Tightening for Non-GSE-Eligible Loans

Mortgage banks and credit unions continued to indicate a net easing of credit standards over both the prior three months and next three months for non-GSE loans. However, depository institutions indicated a net tightening of credit standards over the prior and next three months. This shift in depository institution appetite for retained mortgage risk is consistent with the soon-to-be-enacted Current Expected Credit Loss (also known as "CECL") accounting standard that will require banks to hold more reserves against expected losses.

The Mortgage Lender Sentiment Survey by Fannie Mae polls senior executives of its lending institution customers on a quarterly basis to assess their views and outlook across varied dimensions of the mortgage market. The Fannie Mae third quarter 2019 Mortgage Lender Sentiment Survey was conducted between July 31, 2019 and August 11, 2019 by PSB in coordination with Fannie Mae. For detailed findings from the third quarter 2019 survey, as well as survey questionnaires and other supporting documents, please visit the Fannie Mae Mortgage Lender Sentiment Survey page on fanniemae.com. Also available on the site are special topic analyses, which focus on findings and analyses of important industry topics.