After a booming 2020, a growing proportion of mortgage lenders expect lower profits in the coming months as rising interest rates intensify competition.
In the first quarter, 52% of industry executives predicted their upcoming margins will shrink, compared to 48% in the previous quarter and just 4% a year ago, according to Fannie Mae's mortgage lender sentiment survey.
In contrast, 15% of respondents expected profit margins to increase from 19% to 51% annually on a quarterly basis. The remaining 33% believed profits will stay where they are today.
As a result, the net share of lenders' margin sentiment fell to -37% for the second straight quarter. It hit a record low for the survey, beating the fourth quarter of 2018 by -34%. The two-quarter negative streak came after spinning high for the past three quarters. Lender competition was the most frequently cited reason for expecting falling margins, followed by a shift to a more buying-intensive market.
"With a slightly higher interest rate forecast, we expect refinancing activity to gradually ease," said Doug Duncan, chief economist at Fannie Mae, in the report. “The recent surge in 10-year government bond yields is putting pressure on mortgage rates. Some lenders said they were willing to pay some of these costs for the time being in order to keep the volume going. “This shows that they are ready to value loans below expected rates.
A net share of 65% of lenders predict an increase in purchase demand, while only a net share of 15% said so for refinancing. These compare to 29% and -3% from the last quarter and 75% and 63% from last year.
"In the long run, continued upward pressure on interest rates would likely dampen home sales and mortgage emergence as lenders raise mortgage rates," Duncan continued. "This could lead lenders to reduce their production capacity."