Lender Profit Expectations More Positive as Compliance Cost Concerns Recede

Katie Penote

202-752-2261

WASHINGTON, DC – Mortgage lenders have reported a net positive profit margin outlook for a third consecutive quarter, according to Fannie Mae’s third quarter 2016 Mortgage Lender Sentiment Survey^®. Conducted in August, the survey results show that 28 percent of lenders said they expect their firm's profit margin to increase over the next three months, compared with 17 percent who expect it to decrease and 55 percent who expect it to remain roughly the same. When asked what they expect to drive the increase, the top two reasons remain operational efficiency and technology, and consumer demand – the same two factors cited in every survey. However, among lenders who expect a decrease in their profit margin, the share citing government regulatory compliance as a driving factor declined significantly, reaching a survey-low 39 percent and compared with 61 percent during the same period last year. This marks the first time in the survey’s history that government regulatory compliance is not the top reason for eroding profit outlook.

“For lenders, the most encouraging aspect of the survey is a significantly brighter profit outlook this year compared with last year,” said Doug Duncan, senior vice president and chief economist at Fannie Mae. “More lenders, on net, reported a positive profit outlook for the third straight quarter, the first time that has happened since the survey’s inception. Their perception of profit outlook in the third quarter of this year is in stark contrast to the third quarter of 2015, when a sizable net share of lenders expected a deteriorating profit outlook over the next three months. It appears that lenders have incurred the increased compliance costs from new regulations such as TRID, and are now on a stabilized though higher-cost footing to focus on growth strategies. However, any upward move in interest rates will bring reduced origination volumes and competitive pressure on profits. That pressure would likely result in lowered expectations and additional demands for cost containment.”

MORTGAGE LENDER SENTIMENT SURVEY HIGHLIGHTS
Purchase Mortgage Demand Over Prior Three Months and Expectations for Next Three Months Near Same Levels Seen One Year Ago

• For purchase mortgages, the share of lenders reporting net demand growth over the prior three months is similar to this time last year (Q3 2015), across all loan types.
• Net demand growth expectations for the next three months also remain near levels seen a year ago.

Upward Trend in Refinance Mortgage Demand Over the Prior Three Months

• For refinance mortgages, the share of lenders reporting net demand growth over the prior three months has gradually trended up this year across all loan types, reaching a survey high this quarter, likely driven by further mortgage rate decline after Brexit.

Moderate Easing of Credit Standards Reported Over Prior Three Months, but Expectations for Next Three Months has Gradually Trended Down

• Lenders continue to report modest net easing of credit standards across all loan types for the prior three months. However, the share of lenders reporting net easing has gradually trended down, after reaching its survey high one year ago (Q3 2015).
• Lenders continue to report modest net easing expectations across all loan types for the next three months. However, the share of lenders reporting net easing has gradually ticked downward since Q4 2015.

More Overall Stability in Mortgage Execution Outlook

• This quarter, more lenders reported expectations to grow GSE (Fannie Mae and Freddie Mac) shares and reduce portfolio retention shares.

Change in Direction for Mortgage Servicing Rights Execution Outlook

• Reversing the trend seen so far this year, this quarter, more lenders reported expectations to decrease their share of MSR sold and increase the share of MSR retained.

Lenders Continue to Expect an Increase in Profit Margin over the Next Three Months

• Lenders reported a net positive profit margin outlook for a third-straight quarter, and a significant increase from this time last year (Q3 2015).
  • The largest year-over-year increases in net profit margin outlook were seen among smaller institutions and credit unions (see survey Appendix for results by institution size and institution type).
• Lenders expecting increased profit margins cite higher operational efficiency and rising consumer demand as the key reasons, while those reporting lower profit margin outlook point primarily to market competition and regulatory compliance.
  • The share of lenders citing government regulatory compliance as one of the top two reasons for their decreased profit margin outlook has reduced to 39%, from 67% last quarter and 61% the same quarter last year, reaching a survey low.

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 2016 Mortgage Lender Sentiment Survey was conducted between August 3, 2016 and August 15, 2016 by Penn Schoen Berland in coordination with Fannie Mae. For detailed findings from the third quarter 2016 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.

Opinions, analyses, estimates, forecasts, and other views of Fannie Mae's Economic & Strategic Research (ESR) group or survey respondents included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the ESR group represent the views of that group or survey respondents as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.