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How lenders can prepare for increasing regulatory pressures

As compliance becomes an increased focal point for mortgage lenders and investors, staying ahead of state and federal regulations can be the difference between a flourishing business and one mired in fines.

Mortgage

Mortgage lenders expect profit margins to drop

Only 15% of lenders believe profits will increase over next three months

For the second consecutive quarter, mortgage lenders expect profit margins to decline in the months ahead, according to a newly released report from Fannie Mae.

The report shows 52% of lenders surveyed believe profit margins will decrease, compared to 48% in the prior quarter. Only 33% believe profits will remain the same, and 15% believe profits will increase.

But lenders also believe consumer demand will grow in the next three months, despite falling across all loan types in the previous three months – and despite the largest net percentage of lenders in survey history expecting a decrease in their profit margin outlook.

Consumers also indicated greater confidence in job security, vaccine mobilization, and the expected easing of lockdown restrictions along with upcoming warmer weather.

“The recent rise in the 10-year Treasury yield is putting some upward pressure on mortgage rates,” said Doug Duncan, Fannie Mae’s chief economist. “Some lenders commented that for now they are willing to absorb some of these costs to maintain volume. However, in the longer term, continued upward pressures on interest rates would likely dampen home sales and mortgage originations as lenders raise mortgage rates.”

Reported purchase mortgage demand over the past three months fell for GSE-eligible and government loans, but remained flat for non-GSE eligible loans, per the report.

In February 2021, the average primary mortgage spread came in at 155 basis points, below pre-pandemic levels and below the prior decade’s average of approximately 170 basis points. For refinance mortgages, the net share of lenders reporting demand growth over the prior three months decreased significantly across all loan types from last quarter, reaching the lowest level since the second quarter of 2019.

The improving economic picture is putting upward pressure on mortgage rates, which have moved above 3% in recent weeks for 30-year fixed-rate loans. The Mortgage Bankers Association is forecasting that the Freddie Mac survey rate will reach about 3.5% by the end of 2021.

“Despite continued strong expectations for purchase mortgage demand moving forward, many lenders are signaling caution about their profitability and market competitiveness,” Duncan said.

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