Lenders are now more confident than ever in the economy, however, a shift towards purchase mortgages creates challenges for their profit margins, according to Fannie Mae’s first quarter 2017 Mortgage Lender Sentiment Survey.

Mortgage lender expectations hit the highest level since the survey’s inception in the first quarter of 2014. Lenders from institutions of all sizes are more optimistic about the direction of the economy. This quarterly online survey polls senior executives of Fannie Mae’s lending customers to assess their current activities and market expectations.

“This quarter, lenders’ optimism toward the overall economy and home price appreciation hit survey highs, mirroring the consumer confidence seen in our February Home Price Sentiment Index,” said Doug Duncan, Fannie Mae senior vice president and chief economist. “However, lenders’ profit margin outlook remains significantly less positive than this time last year and two years ago.”

Lenders are not as optimistic about the growth of purchase mortgage, as expectations declined significantly with the increase in mortgage rates. In fact, the share of lenders expecting an increase in purchase mortgages over the next three months fell to the lowest level in the survey’s history.

While expectations for profit margins rose from last quarter’s three-year low, they are still significantly lower than the first quarter last year.

“Lenders cite competition from other lenders and a market shift from refinance to purchase, both of which reached survey highs, as the top reasons for the weak profit margin outlook,” Duncan said. “With mortgage rates expected to rise, we expect refinance activity will fall and purchase affordability will tighten, increasing competitive pressure in a shrinking mortgage market.”

“Lenders may choose to adjust their production capabilities and staff resources given their profitability outlook,” he said.

This chart shows the movement of lenders' profit margin outlook over the past two years.

Click to Enlarge

profit margin

(Source: Fannie Mae)

But lenders aren’t the only ones more confident in the economy. The most recent survey of consumers conducted by the University of Michigan shows that while Democrats are becoming more pessimistic, consumer confidence continues to rise.

A recent consumer-focused survey from Fannie Mae shows consumers’ faith in the housing market is stronger than it’s ever been before.

And builder confidence in the market for newly built single-family homes just hit a 12-year high after seeing President Donald Trump’s actions on regulatory reform, according to the latest National Association of Home Builders and Wells Fargo Housing Market Index.