Mortgage Lenders Remain Bearish on Profits Amid Rising Mortgage Rates, Declining Volume

WASHINGTON, DC – A majority of mortgage lenders continue to expect near-term profitability to decrease amid rising mortgage rates and declining refinance activity, according to Fannie Mae's (FNMA/OTCQB) Q1 2022 Mortgage Lender Sentiment Survey® (MLSS). According to the survey, 75% of mortgage lenders believe profit margins will decrease in the next three months, up from 65% in the prior quarter, while 17% believe profits will remain the same and 9% believe profits will increase. Competition from other lenders, market trend changes, and consumer demand were the top reasons cited for the decline in profitability expectations. Mortgage lenders also grew more pessimistic about the larger economy in Q1 2022, with 59% now reporting that the economy is on the wrong track, compared to 29% in Q1 2021.

Compared to last year, across all loan types, more lenders this quarter reported reduced consumer demand over the previous three months for both purchase and refinance mortgages. Looking ahead, again across all loan types, fewer lenders than last quarter expect purchase mortgage demand to grow in the next three months, while the vast majority of lenders continue to expect refinance demand to decrease.

"For the sixth consecutive quarter, mortgage lenders expressed bearishness about near-term profit margin expectations amid headwinds from declining refinance activity, slower purchase mortgage demand growth, and narrowing spreads," said Doug Duncan, Senior Vice President and Chief Economist at Fannie Mae. "For consumers, rising interest rates, lack of supply, and strong home price appreciation have reduced refinance activity and further constrained home purchase affordability, which, of course, is dampening lenders' expectations of future business activity. Numerous uncertainties, including heightened inflation and the Fed's monetary policy reaction, which must now also account for the inflationary impact of Russia's war on Ukraine, suggest increased market volatility, but the general underlying, upward rate trend aligns with lenders' expectations."

Survey Highlights and Other Notes

Read the Q1 2022 MLSS research report for additional information and analysis.

Primary-secondary mortgage spread remains elevated

The primary-secondary mortgage spread averaged 127 basis points in Q3 2021, 9 basis points above the 2019 average, though down from the peak of 174 basis points seen in Q3 2020.

Consumer demand expected to remain largely stable for purchase mortgages but decline for refinances

For purchase mortgages, demand growth for the prior three months continued its downward trend. The net share of lenders reporting demand growth over the prior three months reached the lowest reading for any first quarter over the past two years across all loan types. For the next three months, the net share of lenders expecting demand growth climbed significantly from last quarter across all loan types, but still showed the lowest reading for any first quarter in survey history.

For refinance mortgages, the net share of lenders reporting demand growth over the prior three months, as well as the net share expecting demand growth for the next three months, remained similar to last quarter but generally continued its downward trend across all loan types – reaching the lowest readings in three years (since Q1 2019). For government loans, the net share expecting demand growth over the next three months reached a new survey low (since survey inception in Q1 2014).

Lenders expect credit standards to remain largely unchanged

The net share of lenders reporting easing credit standards over the prior three months, as well as the net share expecting easing over the next three months, remained generally flat across the past four quarters.

Consumers continue to report widely divergent homebuying and home-selling conditions

In coordination with PSB, Fannie Mae also surveys consumers monthly as part of its National Housing Survey®, of which the Home Purchase Sentiment Index® is derived. In February, consumers continued to report widely divergent views of homebuying and home-selling conditions. Only 29 percent of consumers reported that it was "a good time to buy" a home, while 72 percent believe it's a "good time to sell." More consumers also reported expectations that mortgage rates and home prices will continue to rise in the next 12 months.

About Fannie Mae's Mortgage Lender Sentiment Survey
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 first quarter 2022 Mortgage Lender Sentiment Survey was conducted between February 1, 2022 and February 14, 2022 by PSB in coordination with Fannie Mae. For detailed findings from the first quarter 2022 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.